Are There No Hard Limits On Financial Finagling?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The hard limits are hidden, and we will discover them only when it's too late to modify the self-destructive behavior and policies we've pursued as "safe" and "forever."

Why do hard limits matter? Because we only change when we've run up against them. Those extra few pounds we've put on? Humans being what they are, few change their behavior before the heart attack: the extra pounds stimulate high-minded attempts at reform that are soon abandoned as too painful and difficult. It takes the hard limit of a heart attack--change your diet and fitness or die--to actually trigger transformative changes.
This same dynamic is repeated throughout human life: debt piles up and we reckon we can maintain our Status Quo lifestyle with a consolidation loan, etc., but the only thing that really forces transformative change in spending/saving behavior is the hard limit of no more credit/bankruptcy.
Life without hard limits is a series of phony reforms to placate critics, fudged numbers, self-serving justifications and doing whatever is necessary in terms of appearances to keep doing what we're doing: make a show of skipping dessert in front of others, and then consume a carton of ice cream at home when nobody's looking.
We avoid change, pain and difficult endeavors if at all possible. This makes short-term sense: why take on the risks of changing what's worked for years/decades?
What do I mean by financial finagling? I mean expanding claims on real world assets without increasing real-world assets. Here's how this works in the real world:
1. The government wants to spend more money than it collects in tax revenue.
2. So the government sells a Treasury bond, i.e. a promise to pay interest in exchange for a chunk of cash.
3. The central bank creates money out of thin air and buys the government bond.
4. The central bank then holds the bond as an asset.
On the face of it, this finagling seems to be magic: the government got free money to squander propping up the Status Quo, and the central bank created an asset on its balance sheet. An asset: wow!
There seems to be no limit to this magic. It seems as if the central bank can print endless amounts of money to buy endless amounts of bonds which then fund endless amounts of government spending. Yes, the government pays interest on the bonds, but the central bank receives the interest payments and can refund the majority of this income to the government.
The net cost of this friction is so low, it's like a financial perpetual motion machine.
There doesn't appear to be any hard limits on government borrowing or central bank money creation. If nobody else wants to buy Treasury bonds because the private sector has lost faith in the state's ability to support all this debt, the central bank (the Federal Reserve) can print enough money to own virtually all Treasury bonds.
The Fed can also print enough money to buy most of the mortgages in the U.S., and most of the stocks, most of the empty malls, most of the junk bonds--everything that is no longer in demand in the private sector.
Where is the hard limit on this central-bank buying of assets? On the surface, there doesn't seem to be any limit.
There are limits, but they're operating beneath the surface. When the central bank and state create money to buy assets, what they're essentially saying is: the price for these assets discovered by the free market doesn't fit our political agenda, so we're suffocating price discovery to set prices where they will serve our perception-management needs.
The problem with suffocating price discovery is the market price is a critical piece of information participants need to know to make prudent risk management decisions. If this necessary information is suppressed or distorted by central bank/state asset purchases, all decisions made using the false price information will be systemically misinformed.
Robbed of the information needed to make good decisions, participants can only make bad decisions.
Another way of making the same point is: systemic risk is not visible until it explodes out of nowhere. It was piling up beneath the surface, but given the manipulation of pricing (of assets, risk, capital, etc.), this accretion of systemic risk was not visible to participants.
To central banks/states, that was the whole idea behind buying assets: to mask the systemic risk of centrally planned financial policies, and to nudge participants into making decisions that align with the desired political goals of the Power Elite.
For example, borrow money for next to nothing and use it to buy risk assets such as stocks, because this will create the illusion of growth and prosperity--and perception management is all that counts in maintaining political control.
We can visualize the diminishing returns on buying assets to suffocate price discovery as an S-Curve. The entire process of financialization is tracking an S-Curve of diminishing returns:
One way to understand the S-Curve is that doing more of what worked in the past is akin to pushing a string: it no longer generates the returns it did at the start.
So the Fed buys a trillion dollars in bonds and mortgages, and at first the stock market soars. The next trillion generates a hefty rise in stocks, but less than the first injection of monetary heroin, and so on: it takes ever-larger doses of monetary heroin to generate the "high" of another stock market rally.
So financial finagling has two parts:
1. Suffocating price discovery to push participants into doing what central planners want them to do, even though it is piling up systemic risk
2. Creating "assets" out of thin air doesn't create more land, iron ore, gold, human capital, knowledge, innovation, etc.--i.e. real-world assets.
So the net result of creating "assets" out of thin air is to depreciate real-world assets because these phantom assets are ultimately claims on real-world wealth.
In other words, creating $20 trillion in phantom assets doesn't actually add $20 trillion in real wealth to the economy; it simply adds an additional $20 trillion in claims on the existing real wealth.
Just as many on the edge of suffering a heart attack have no awareness of the risk they face, our financial system is blind by design to the enormous systemic risks generated by central planning distorting price discovery for the political purposes of perception management.
The hard limits are hidden, and we will discover them only when it's too late to modify the self-destructive behavior and policies we've pursued as "safe" and "forever."

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power steering's picture

I missed that 2012 collapse but otherwise a really good discussion

TideFighter's picture

Hard limits? It certainly isn't the 47%. 

NoDebt's picture

That S-curve doesn't look anything like the stock market.  

I call bullshit.  On what?  I don't know.  I'm "big picture" kind of guy, I don't do the detail stuff.

Vampyroteuthis infernalis's picture

Really what is going on is our gov't and leaders is borrowing money to spread out losses over decades. Why take a huge loss now when you can borrow easy money and pay out over several decades. Get in spending trouble again? Borrow even more and kick the can further.

max2205's picture

I might say one day he'll be right, but I have my doubts

DonutBoy's picture

Yeah  - I liked the discussion too - but the timing of his thesis comes apart there at the end.  Has the SPX P/E come back to Earth?  Have home prices normalized to median income?  No - they haven't, we haven't returned to true prices.  The Fed's propping up asset classes "in search of a wealth effect" - which is in reality an attempt to protect the fraudulent balance sheets of it's member banks - continues unabated and indeed unnoticed by the vast majority of Americans.

Dr. Richard Head's picture

Next door to me is a foreclosure - 4 bedroom, 3 bath, 2,500, finished basement, on a 1/3 acre.  The owner moved out of town and rented it to a family.  Once the renter found out the owner stopped paying mortgage, he did too.  This was 2.5 years ago.  He lived in the house rent free until Sheriff sale.  Prior to auction, he tried to purchase the home with the bank.  Bank wouldn't work with him.  Went to auction in January (appraised at $190K) and rented tried to bid on home.  Bank outbid him every bid up to $240K.  Renter walked.  Here it is in August and the house isn't even on the market.  Makes sense to me.

scraping_by's picture

Carry cost is nearly zero.  I assume no maintenance, and property taxes can be negotitated. Still an asset at full price on the books. Makes sense of a sort.

armageddon addahere's picture

As long as the bank has the house on the books at $240K they are solvent. If they sell it at a loss down goes their assets. If their assets are worth less than their liabilities they are bankrupt, ruined.

So it is in their interest to buy the house (for money they pay themselves) and keep it on the books at full market price. If they start selling off houses, or mortgages, for what they are worth they are bankrupt and they know it.

Now you know why the real estate market is still screwed up 6 years after the collapse.

El Vaquero's picture

Look around you.  We're in the middle of a collapse.  Will we bottom out by 2016?  Who knows, but the masses are already getting squashed. 

firstdivision's picture

The heart attack will be energy.  We live in a faux endless natural resource society, and NG is going to be the first to go.

silverer's picture

As my Dad once said, "For something to really happen, somewhere somebody has to do real work."

GetZeeGold's picture



I might be what does the job pay?

Spastica Rex's picture

I would bet every single person with a job of any sort would proclaim loudly that they indeed do "real work."

I know the Oregon Department of Education bureaucrats I had the misfortune of "working" with for many, many years thought so.

edit: Personally, I like to stick with this defintion: W = Fs.

No F and/or no s, then no W.

pakled's picture

Yep. I suspect that Blythe Masters claims she does real work.

Vampyroteuthis infernalis's picture

Yep. I suspect that Blythe Masters claims she does real work.

Being a thief is real work so I have been told.

Itchy and Scratchy's picture

So much for the 'paper-less' society!

Dr. Richard Head's picture

"The hard limits are hidden, and we will discover them only when it's too late to modify the self-destructive behavior...."

There's a police state app for that.

Bioscale's picture

The knowledge about the final result of credit expansion is pretty old:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

- Ludwig von Mises

Dr. Richard Head's picture

But my wife needs more sundresses charged on her credit card to add to her piles of sundresses in the closet with the tags still on them.  I need that new Lincoln MKZ on lease.  We need to redcorate the house for the fifth fucking time.  My thirteen year-old daughter needs more shorts that show her ass cheeks and tops to show her cleavage.  Don't forget the 6 year old - more fucking stuffed animals and toys that will be broken and strewn about the house like a drunk tossing bottles on a binge drinking episode.  We can't go without a fucking vacation and all. 

The banks extended my the extra credit (if extra credit was good in school it should be in real life too, right?).  If the fed can't expand the credit supply quickly enough my family and I will do our part.  We wouldn't want the terrorists to win no would we?

scraping_by's picture

Yeah, but individual consumer debt's a rounding error seen against the rivers of smoke conjured to keep financial 'assets' at or above the issue price. Even all of us together can't spend our futures on the scale of QE Infinity. Too dependant on actual goods and services, tied down to the real economy. To get a respectable number of zeros on the debt load, you need to enter the realm of imagination and entitlement.

The family splurge isn't a small version of financial finagling. Different worlds entirely.

ZeroRights's picture

May I call you Dr. Dick Head? Nevertheless you sound like a comrade from the People's Republic of Michigan. Where socialism works perfectly, just like the beacon of a city Detroit.  

Jumbotron's picture

As if Capitalism is working SOOOoooo well today.

All "isms" are universally screwed by their application of humans.

Some take longer to expose this fact.....but they all get exposed in the end.

So the REAL existential question can we change as a species so that when the next "ism" to come along, we can finally make it stick so we don't have to keep having revolutions such as the American Revolution or the Bolshevik Revolution in order to fool ourselves for several generations until we get sick of what we did with it and have yet another Revolution ?

Sorry.....let me get back in line......Captialism good....Socialism bad.    Or is that Socialism good.....capitalism bad ?


jarana's picture

It's always wise to recall to Mises.

scraping_by's picture

Or better yet, recognise how he frames the problem and break out into the real world. For instance, the warmings about the debt crash are based on the assumption of the sancity of debt. Rise above and see it as a socially accepted obligation, it's easier to declare it odious debt and discount it as much as need be. Kind of hard on the bankers, but less for the rest of us to worry about.

Downtoolong's picture

Yellen will finally admit there was an asset bubble about the time we all realize it has morphed into a mushroom cloud.

El Vaquero's picture

And the scary thing is that said mushroom cloud could be a metaphor for a financial crisis, or it could be real mushroom clouds.  Or both.

q99x2's picture

I suggest you round up every bankster, imprison them, and start counting their stolen wealth.

IronShield's picture

It is until it isn't.  Not much we can do but prepare for what is obviously coming.  The vast majority are living as if what was will always be; they will suffer the most. 

We can't turn our back on them since so many are family and friends; but a certain amount of tough love will be required.  Some will deal, others will succumb.  I believe we will see a hardening of the American people that will put us back on the road to recovery, in due time.

scraping_by's picture

Most people lived through the Great Depression by expanding the sharing impulse beyond famility and friends. Near socialism, with a large dose of charity. But that was here in flyover country, in the urban and suburban centers things might be different.

El Vaquero's picture

You know, I made my own posole last night.  By made, I mean shot the elk that was in it, grew and nixtamalized the corn, etc...


I know I can survive.

Jack Sheet's picture

Chuckie, I know your Bachelor's was in basket weaving and creative photography but you can still tell us what the x and y axes on that graph depict and what the units are.

Yen Cross's picture

      Taking the path of least resistance, is hardwired into most humans... Unfortunately taking said path leads to complacency, dependance and eventually addiction for many.

      As a general rule, we all know the outcome of addiction if it's not properly dealt with.

lasvegaspersona's picture

Jim Fixx modified his behavior...before he dropped dead ..jogging!

Oops..did I mess with your metaphor?

Stuck on Zero's picture

Why the long discussion?  COunterfeiting has never been known to be good.


malek's picture

The hard limit on the current strain of financial finagling is reached when the trust in the US Dollar has been destroyed.

And that will happen eventually, at the latest when "we run out of other people's money"
uh, that has now become an Orwellian statement, better to say "run out of other people's true assets."

andrewp111's picture

The only hard limits are energy resources and military conflict with external powers.

The Magus's picture

I have been reading articles by all the usual suspects for about ten years (Orlov, Kunstler, Smith, Stockman etc). They have been talking incessantly about 'The Collapse' and its inevitability.

Their lecture circuits, books, donations and blogs depend on repeating and repeating the message so it becomes propaganda.

The USA will collapse one day. However not during these guys lifetimes (much to their chagrin).

The collapse will likely take of the order of a century (Rome's collapse took even longer).

Hohum's picture

There is a hard limit right now: interest rates.  If the 10 Y UST moves above 3%, it's all over.  Can the Fed keep it below 3% for years? Stay tuned, my friends.

Radical Marijuana's picture

While true enough, this article may be about "tempest in a teapot." 


"The hard limits are hidden, and we will discover them only when it's too late to modify the self-destructive behavior and policies we've pursued as "safe" and "forever."


At the present time, the main dialectical debate in my mind is not the social insanities of financialization, regarding every economic decision being made inside that context (which now appear to be obvious to me), but rather the bigger picture about climate change (which is not yet so obvious), whose dilemmas I could currently summarize as my attempts to guess which one of the following views will turn out to be more correct:

Guy McPherson versus Ben Davidson


Basically, are changes in the combined Sun/Earth magnetic systems going to give us a temporary break from the otherwise apparently runaway feedbacks of greenhouse gas mechanisms? (At the present time, I feel I am clutching at the straws of some reasonable hope for the former, to postpone the latter.) Depending upon the outcome of who turns out to have been more correct, Guy McPherson or Ben Davidson, as I linked above, then the next few decades could become MORE ABNORMAL THAN WE CAN CURRENTLY IMAGINE!

At the present time, I am personally betting that Ben Davidson provides some correct qualifications to Guy McPherson's views. Therefore, I believe that we may have some more time, inside that bigger picture, to allow the other basic forms of runaway madness, such as the MAD Money As Debt systems, backed by the MAD Mutual Assured Destruction systems, to play through ... Inside of a human world of "financial finagling" operated on the basis of enforced frauds, our collective abilities to deliberately disregard the ways that everything we did was based on ignoring the basic laws of nature, because of making "money" out of nothing as debts, to "pay" for everything, ARE WAY MORE SIGNIFICANT TO THE IRREPARABLE DESTRUCTION OF THE NATURAL WORLD, THAN TO THE IRRECONCILABLE SOCIAL POLARIZATIONS, except that the runaway social polarization due to enforced frauds (especially through the funding of the political processes) is the primary reason how and why we collectively have been able to pursue "destructive behavior and policies" as if those were "safe" and "forever."

The "hard limits" of the natural environment are more important than the softer limits of the social world. Tragically, if that turns out to be true, while those limits approach at an exponentially accelerating rate, then ALL the articles in Zero Hedge, about whatever else human beings are doing around the planet, are going to eventually turn out to be trivial, compared to what they have collectively done to the planet itself!

Of course, I am well aware that, should that view turn out to be correct, then it is practically pointless to communicate that view, since the failures to prevent fraudulent financialization from driving runaway social polarization are going to be trivial compared to that enabling the destruction of the natural world. The problem is that those views of the combined consequences of human beings triggering runaway climate change are NOT merely some very small probabilities of remotely possible, cosmically caused, mega-disasters, but rather, things which human beings have bit by bit done to themselves, and their planet, in ways which gradually accumulated, until they become more overwhelming in their consequences than everything else human beings were doing!

The ability of ENFORCED FRAUDS to control civilization has become far more problematic than merely its effects of driving runaway social polarization through debt insanities towards provoking death insanities, which were still within some sort of human control. The ECONOMICS OF ENFORCING FRAUDS has simultaneously been driving the destruction of the natural world to apparently be driven beyond human control, where the only thing left is that we might be able to pray for some temporary relief from more cosmic forces, before that runaway destruction of the natural world becomes more obviously the case.