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Central Planning Update (In Theory And Practice) - You Are Here

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Submitted by Jeffrey Snider of Atlantic Capital Management

Volatility Is The Price Of Real Progress

As we all ponder what may come at us in 2012, the ongoing volatility in almost every corner of every marketplace is certainly concerning, as it should be.  This record volatility has enormous implications for any investor, but especially those in leveraged ETF’s.  Volatility is the anathema to these vehicles, as has been well discussed, but that does not diminish their targeted usefulness.

As a portfolio manager I use leveraged inverse ETF’s as hedges against the dramatic downside.  They have a very narrow window and only perform when the market more or less moves in a straight-line down – just as it did in early October 2008, May 2010 or July/August 2011.  Other than those sustained sell-offs, they are a drag on portfolio performance, a cost of doing business in this risk-on, risk-off “marketplace”. 

I willingly pay that cost because I have no concrete idea when another fit of sustained selling will actually take place, but I have more than an inkling that it will.  Instead, this massive and growing volatility, even though it is costing me some short-term performance, is a good sign that there is actually progress being made.  What we are witnessing is a titanic battle between the world as it really is and the one central banks need you to believe it might be (if only you would set aside your own perceptions and self-interest).  The fact that volatility has risen is a clear indication that the central bank-inspired anesthesia is no longer as effective as it was in 2009, or even in the QE 2.0 inspired insanity of 2010.  Reality, and the free market, is being imposed – and that means there is a place for even narrowly-useful hedging vehicles.

The current market battle is nothing more than the extreme measures of the rational expectations theory and a form of the fallacy of composition, combined with the political aspirations of a century-old theoretical notion of how the economic system should be ordered.  Mainstream economic “science” has developed in a relatively straight line since the Great Depression, starting with the idea that the economy must be governed in emergencies.  Executive Order 6102 and the subsequent devaluation of the dollar solidified the place for the entire field of economic management, marking perhaps the last time it would be challenged by mainstream thought.

Without the guiding hand of the educated economist, capitalist, free market economies are believed to be wrought with the danger of total collapse, unable to escape from their own emotional whimsies.  At the most primal level of modern economics is a deathly fear of deflation, a fear that is best summed up by Fisher’s paradox.

In 1933, Irving Fisher published a paper in the Federal Reserve’s Econometrica circular that amounted to a point-by-point logical deduction of the string of events that led to the unusual collapse of the economic and banking systems.  The scale and pace of the disaster confounded “experts” of the era (it seems experts have trouble with inflections in every era), so his deduction offered a highly plausible, well-reasoned and “logical” explanation. 

For Fisher, the combination of over-indebtedness and deflation was the toxic mix from which the calamity grew.  But within that mix lay a paradox that formed a trap by which no self-made recovery was possible:

“…if the over-indebtedness with which we started was great enough, the liquidations of debts cannot keep up with the fall of prices which it causes.  In that case, the liquidation defeats itself.  While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed.  Then, the very effort of individuals to less their burden increases it, because the mass effect of the stampede to liquidate in swelling each dollar owed.  Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions:  the more the debtors pay, the more they owe.  The more the economic boat tips, the more it tends to tip.  It is not tending to right itself, but is capsizing.”

The lessons of this paradox are interwoven into the fabric of modern/conventional economics, that whenever deflation might be present a recovery has to be forced since it cannot start on its own.  But it is extremely curious that only one half of the equation was chosen as an outcast:  deflation.  Over-indebtedness has, obviously, been warmly embraced in the decades since Fisher’s proposition.  The development of the mainstream of economics has led to the belief that intentional inflation can always defeat deflation, and therefore debt can assume a role, even a primary role, within the schematic of economic stewardship.

Fisher’s paradox survives in many forms, but among the most important was a logical derivation, namely the idea that economic participants can do what they believe is best for themselves, but in doing so harm themselves through systemic processes.  This is known as a fallacy of composition; that what is good for individuals is not necessarily best for the whole.  It overturned the traditional economic notion of an economy at its most basic level, from the time of Adam Smith describing individual self-fulfillment.  Sure, this idea had been around for awhile before Fisher’s paper, but the Great Depression “proved” that the fallacy was real and potentially cataclysmic.  Originally it was confined to the narrow interpretation of depression economics, and so the evolution of unquestioned economic management started from there.

The economics profession truly believes that there exists economic states where individual self-maximization no longer benefits the larger societal association of economic actions, so it “logically” follows that some process (or entity) has to step in and enforce conditions contrary to individual notions of self-maximization.  In other words, there are times when people must be forced to do what they perceive is against their own best interest.

In the context of depression avoidance this seems to be rather innocuous, but in the displacement of political thinking since the 1930’s, it was a slippery slope.  What Fisher’s paradox essentially required was a benevolent authority to administer and visit a kind of beneficial tyranny upon the economic population.  In the constant forward roll of history, though, the slippery slope of needed benevolence has been applied to a larger and larger cohort of economic circumstances – emergencies breed human desire for such authoritarianism.

It is important to remember that the Federal Reserve was a secondary institution for much of the post-Depression period.  After the monetary debacles of the Great Depression, especially the unnecessary reserve requirement hike in 1936 that initiated the depression-within-a-depression in 1937, the Fed was relegated to being simply a monetary check-writer.  The Treasury Dept. was the economic powerhouse, especially during a time in which the dollar was the primary tool of economic management.  The Fed was consigned to managing the money supply around treasury debt auctions to ensure the federal government’s uninterrupted ability to borrow (in some ways things never change).  When that borrowing exploded in 1965, the money supply went with it and the seeds of the Great Inflation were embedded.

Paul Volcker changed this with his “heroism” in defense of the dollar, a dramatic departure from the previous era of Treasury Dept. domination.  Conventional wisdom posits that it was Volcker’s Fed that vanquished the inflation dragon, in doing so he “created” another pillar of the fallacy of composition (high interest rates were not good for individuals, but seemed to be good for the larger system).  The chastened Fed of 1965 that allowed inflation to begin building was dropped for the activist Fed of 1980 that could apparently do no wrong (the monetary history of the 1970’s was completely and conveniently ignored).  The Fed’s reputation soared with the perceived economic success of the 1980’s, handing Alan Greenspan an amount of power unparalleled in human history. 

But how much economic success in the 1980’s was earned?  Again, conventional wisdom sees the Great Inflation ending in 1982, giving way to the Golden Age of Economic kingship – the Great Moderation.  What I see is simply a transformation of inflation from consumer prices to asset prices.  Instead of overwrought money creation circulating within the real economy in the form of wages and higher consumer prices, new credit production capabilities allowed a secondary circulation of credit money into assets, indirectly feeding into the real economy – first as interest income, second as debt – as the notorious “wealth effect”.  The economy in this age would transform from one based on earned income to one based on paper movements of created money, with the irony of the “wealth effect” being its tendency to incrementally create economic activity without actually creating productive wealth.  The global economy was increasingly reliant solely on money creation, a transformation that cannot be understated and a prime cause for re-evaluating the whole of the Great Moderation.

We see this quite clearly in the consumerism of the period.  In 1975, household spending was still largely a function of wage income.  If we adjust Disposable Personal Income by subtracting asset income (interest and dividends), we see a modest deficit in spending sources of about 3.5%.  Households spent more than they brought in from wages, benefits, government transfers (net of taxes) and rental income. Consumer/household spending needed asset income to make up that small funding shortfall (and to go beyond to generate a positive savings rate).  By the midpoint of the Great “Moderation” in 1990, the spending deficit was a chasm, 19.3%.  Without the $898 billion (nominal dollars) in asset income there was no way that consumer spending would have grown so far so fast.

That interest/asset income was a leftover effect of the Great Inflation when monetary creation found its way into growing stockpiles of “safe” financial assets for the household sector.  By 1990, US households had accumulated $5.1 trillion in deposits and credit market assets (largely US treasury bonds) against only $3.6 trillion in debt (including mortgages).  But that was a huge “problem” for the growing acumen of an activist Federal Reserve.  As the 1980’s progressed, interest rates were declining with consumer inflation (and providing a helping hand to asset prices running wild with credit now focused in that direction).  The mainstream of economics took this as a sign of success, but it was really just a marked decrease in monetary efficiency since new money was now circulating heavily in asset prices (the junk bond bubble and the new, great bull market in equities).

Concurrently, economic management had evolved in the 1980’s with the innovation of the “rational expectations” theory.  It was hailed as a huge advancement in monetary thinking coming out of the Great Inflation.  In many ways it was an adjunct to the fallacy of composition.  The rational expectations theory holds that the economic children of modern society can be fooled into undertaking activity that might be against their own best interest if some benevolent authority simply makes it look like everything will be better in the not-too-distant future.  If the Fed screws with the price and cost of money (for debt accumulation), manipulates the price of gold (for inflation expectations), or “nudges” stock or real estate prices in the “right” direction (the notorious wealth effect), the population will act today on those conjured expectations of good times tomorrow.

By the end of the 1980’s, the S&L crisis (a stark warning that economic management might not have been all that it was advertised to be, a warning that has largely been ignored) threatened to plunge the world back into depression.  The Fed and Alan Greenspan feared the consequences of a banking crisis and any attendant deflation.  The Fed funds rate was pushed from around 8.25% in April 1990 to a ridiculous 3.25% by July 1992 – staying at that low level well into 1994.  Alan Greenspan was trying to save the entire banking system from the S&L crisis by reducing the cost of funds so dramatically (hoping to see an increase in bank profits, leading to higher retained earnings and therefore equity capital upon which to pyramid more debt).  The pressure on household spending because of the collapse in interest rates necessitated a marginal change in spending, but not back toward earned income.  Instead we got the wealth effect and the myth of Greenspan’s genius.

Despite a persistently weak recovery (just ask George HW Bush) from a relatively mild recession, the Fed’s management of the economy into a “soft landing” was hailed as a new form of a New World Order.  The business cycle could be smoothed (or even eliminated) by the marginal attraction to debt and the wealth effect.  If expectations were properly managed, the public would suppress their base emotional instincts and dance to the tune set by the monetary kingship. 

It was hubris of the highest order, of course.  By the time the tech bubble finally burst (another warning of the dangers of an artificial economy) the Fed doubled down to save itself and its primacy.  The results have been disastrous as the marginal economy progressed further and further away from the fundamental foundation of wages and earned income.  The savings rate fell to zero by 2005.  Worse than that, US households added $10 TRILLION (+269%) in debt between 1990 and 2007, with $7 TRILLION coming after 2002 alone.  The household funding deficit reached a high of 24%!  Even worse than that, households had shifted preferences out of “safe” credit market assets or bank deposits and into much riskier price assets simply because the systemic cost of risk was intentionally held artificially low.

The economic foundation of the Great Moderation was an illusion, nothing more than asset prices and debt; wealth effect and rational expectations.  None of this describes a free market, capitalist economy.

Central banks and economists love to talk about economic potential, spending so much time trying to calculate it with their complex modeling capabilities and elegant mathematical equations.  But the hard truth of economic overlordship is rather simple.  The Federal Reserve, in cooperation with global central banks, Wall Street and the interbank wholesale money marketplace, simply substituted credit for earned income.  And the reason is also very simple, because debt accumulation is far more easily manipulated.  As long as households remained attached to earned income and “safe” savings assets, economic management was nearly impossible.  The rational expectations theory needs a system more attuned by asset prices and malleable debt levels.  And so marginal consumer spending shifted away from the solid foundation of jobs and wages right into the hands of the fallacy of composition and the rational expectations theory.

It is more than a little ironic that the Fed so willingly embraced indebtedness in light of their history with Fisher’s paradox.  But mathematical advances in modeling along with a growing commitment to steady inflation allowed the Fed to really believe it could stave off deflation.  So they made a deal with the debt devil to obtain the keys to the marginal economic castle and its grand artificial economy, and in the process dangerously surrendered to the over-indebted part of the Fisher’s paradox equation.  Thus the housing bubble to mediate the tech bubble since the tech bubble had some potentially deflationary consequences.  Even today, everything the Fed has done since 2007 can be seen in these terms:  the fallacy of composition, rational expectations and the preservation of the benevolent stewardship of the economic, academic masters. 

Somewhere in all this transition from Fisher’s paradox to Greenspan’s genius to debt-slavery, the system ceased to function as a free-market, capitalist system.  The free market values the bottom-up dispersal and divergence of billions and billions of free opinions, freely associating together as unfettered price discovery.  A central bank devoted to the fallacy of composition and rational expectations is a top-down system committed to manipulating price discovery to achieve ends that seem to be, and very often are, contrary to the perceptions of the vast majority of doltish economic participants.  The monetarist system is forced upon the population, no matter how much they resist. 

Indeed, the idea of an economic fallacy of composition is itself a logical fallacy.  I have no quarrel with the idea of a fallacy of composition or any logical fallacy for that matter, but logic holds no special place in social interactions.  There are no logical deductions from economics no matter how much math is applied.  It is, and will remain, a subjective interpretation of events.  Even the vaunted Fed and its accumulation of Ivy League PhD’s performs no leaps of logic.  Like anyone else with an opinion, whatever fallacy of composition it thinks it sees is still just subjective interpretation. 

And that is the real danger.  Cloaked in the apparent objectivity of math, the economic elite have gained unlimited economic power.  When you stop and think about it, you can create a fallacy of composition pretty much anywhere (and write and enforce rules based on it) – from the steep tax on savers with five-plus years of zero interest rates to mandating everyone has to purchase health insurance even if they don’t have the need for it.

The volatility of today is nothing more than a fight between the active perceptions of participants trying to maximize self-interest within the classical, traditional concept of a free economy, and the opposing forces of overlordship of the landed economic elite, trying to get the uninitiated to simply follow orders.  The elite really believes that if everyone would gladly pile on even more debt and spend with reckless abandon, the Great Moderation would once again be within reach.  Consumers should only stop thinking for and of themselves since common sense is dangerous to the controlled economic system.  To get more debt “flowing” requires active price manipulation to make the world seem like it will be better in the near future so that people will start acting like it.

Economic potential to the Fed is the level of economic activity of 2006.  To them, this is a cyclical recovery from a cyclical interruption in their normal smoothing of the business cycle.  Sure it veered way off into panic, but that was just more confirmation that human emotion needs to be managed.  But if we view the economy from the historical perspective, the lack of a cyclical recovery is not at all surprising.  The Fed spent decades building up so much monetary inefficiency, so many artificial monetary channels for indirectly “stimulating” economic activity, that it will simply take an enormous amount of new money to get it all moving in the “right” direction again (Ben Bernanke and Paul Krugman at least have that part right). 

The fact that resistance is growing, that investors are not drinking the economic Kool-Aid as much as 2009 or late 2010 is a sign of growing discord.  The efforts in the realm of rational expectations are simply not working.  That is the ultimate danger because the entire central bank gameplan is based on only that.  Without willing adherents (useful idiots?) to the central authority of economic management, everything falls back to the true potential – earned income and boring cash flow of un-manipulated dollars or euros.  With such a massive chasm between marginal economic activity and earned income sources of spending, it is not likely to be a shallow or short transition (this explains most of the inability of the economy to create jobs – so many jobs in the central planning era were based on money creation and financial “innovation”).

That is both the opportunity and danger of a system reaching its logical end.  Put another way, there is a growing realization that while free markets are messy and somewhat unstable, central planning is not really a cure for those symptoms.  In fact, it has created more harm ($13 trillion in debt is only US households) than good, more illusion than solid results.  Volatility means that the free market is at least attempting to impose itself at the expense of central planning’s soft financial repression and control.  By no means is such a beneficial outcome assured; rather the other half of all this volatility (the risk-on days) is the status quo desperately trying to hang on through any and all means (even those less than legal, like bailing out Europe through cheapened dollar swaps).

So the cost of using leveraged ETF’s as insurance against the failure of soft central planning necessarily rises, but that just may mean their ultimate usefulness is closer to being realized.  Unless you know exactly when this transition might reach its conclusion, it is, in my opinion, a cost worth bearing.


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Thu, 12/29/2011 - 19:01 | 2020573 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Planned Chaos, bitchez

Thu, 12/29/2011 - 23:22 | 2020750 economics1996
economics1996's picture


Here is what he was saying.

When the Fed keeps the interest rate 3% higher than the inflation rate good things happen.  Volker-Yes, Bernanke-N0.

Central planning is BS and most economists are full of BS.

Irving Fisher was an economic illiterate.

Deflation helps consumers and hurts capital owners.

Elitist hate deflation, see above.

End the Fed.

Austrian economists are the only ones worth a crap.


Fri, 12/30/2011 - 00:46 | 2021029 Burnbright
Burnbright's picture

I think he is wrong about volatility being a good thing though. He is right that volitility is from the market not being, or at least resisting market manipulation however I would hardly call instability a "good thing". This is the front end of shit you don't want to see the back end of. The volatility is going to get worse, and when it does civil unrest will increase.

Fri, 12/30/2011 - 03:46 | 2021114 Michael
Michael's picture

Barack Obama is the god of the country, or though, he actually thinks he is.

What Obama says goes, goes! Even though there are cases pending against him like that Fast and Furious thing. No one dares to question it. 

Just imagine what that kind of power coursing through your veins feels like if you were BO.

What would you do?

Fri, 12/30/2011 - 04:00 | 2021115 Michael
Michael's picture

Obama's behavior indicates he bows to the whims of the banksters. They are his masters. Four more years of Obama would be just as satisfactory to me as a Ron Paul win. Either way I win. If Obama wins I get to watch the carnage of the sheeple, the idiocracy who gave BO another four years. It's a schadenfreude thing.

Fri, 12/30/2011 - 04:15 | 2021118 Michael
Michael's picture

Iowans really don't have anything to lose voting for Ron Paul.

Congress ends corn ethanol subsidy


Fri, 12/30/2011 - 05:36 | 2021155 Michael
Michael's picture

You will have so much change with a Ron Paul Presidency, it will make your head spin.

There will be no doubt you have had change after a Ron Paul Presidency.

You can quote me on that

Michael N.

Fri, 12/30/2011 - 06:55 | 2021180 BigJim
BigJim's picture

Yes, I saw that. I was surprised to see how little effect the announcement had on corn prices.

To all you ZHers, WattsUpWithThat is an essential antidote to AGW hysteria.

Fri, 12/30/2011 - 08:50 | 2021254 russki standart
russki standart's picture

Agreed.  Thank you for your post. I am now expecting Flakmeister and crew to show up, call you a denier and demand you pay your 'fair' share of the climate debt. By virtue of your birth, you are guilty of the original sin of carbon emission and must pay to Gaia and her great profit ooops, prophet Gore.

Fri, 12/30/2011 - 10:39 | 2021448 Potemkin Villag...
Potemkin Village Idiot's picture

Both corn & copper will easily survive (just as Au & Ag) in secondary markets if TS REALLY HTF...

Privateers will "brew their own" if you know what I mean...

Time to make friends with a hillbilly & biuld yourself a little metal shop in the backyard shed...

Fri, 12/30/2011 - 04:45 | 2021131 delacroix
delacroix's picture

my bad

Fri, 12/30/2011 - 08:44 | 2021241 russki standart
russki standart's picture

economics 1996, good summary. I wish your comments could have some how been posted in advance of the article, saving a good deal of unnecessary albiet rigorous writing. 

Thu, 12/29/2011 - 19:04 | 2020584 SilverRhino
SilverRhino's picture

PM's bitchez ... err fuck (got blowtorched in short term)

Thu, 12/29/2011 - 20:06 | 2020663 Sudden Debt
Sudden Debt's picture

Silver, how it's made

A very cool discovery channel small docu on how it's made. WOW!!

Thu, 12/29/2011 - 23:28 | 2020938 uno
uno's picture

amazing video, so the miners bring all that equipment to the middle of nowhere to extract silver than GIVE IT AWAY because JPM says what the price is.

Fri, 12/30/2011 - 07:13 | 2021183 BigJim
BigJim's picture

The shit is everywhere! It only costs $5 to get it out of the ground! etc, etc.

Sat, 12/31/2011 - 01:35 | 2023266 SilverRhino
SilverRhino's picture

+1000 That was awesome.  Good find. 

5 bucks an ounce my ass ...

Thu, 12/29/2011 - 19:09 | 2020589 Boilermaker
Boilermaker's picture

Are there any reports tomorrow than can be even more glorious than ever expected?  We have to just keep the propoganda machine in 5th gear to keep us this charade.

Seriously...what is it tomorrow?  Any early guesses?

Thu, 12/29/2011 - 20:00 | 2020658 slewie the pi-rat
slewie the pi-rat's picture


o wait, i know!


Thu, 12/29/2011 - 23:22 | 2020932 ThrivingAdmistC...
ThrivingAdmistCollapse's picture

The government will keep trying to massage every statistic.  The point to convince the people that there isn't an economic collapse happening right now.  I'm pretty sure that one way or another we are going to have a semi-planned economy in the near future.

Fri, 12/30/2011 - 11:19 | 2021267 Pegasus Muse
Pegasus Muse's picture

This morning on Squawk, CNBC is presenting Attendance Levels at Theme Parks in Central Florida as an indicator of economic recovery.  When joblessness, unemployment compensation, Food Stamp participation, GDP, home sales, homes prices, car sales all let you down, the professional crap peddlers just create new indicators like Theme Park Attendance to baffle viewers with BS. 

Fri, 12/30/2011 - 09:41 | 2021328 SWRichmond
SWRichmond's picture

OT, but related to central planning and I want this high in this thread for the exposure.  Forgive me.

There is a fiscao brewing in the Republican Presidential Primary in the commonwealth of Virginia.  The state republican party has set a high standard for certfication to be on the ballot.  The date for submission of the required 10,000 verified signatures has passed, and only Ron Paul and Mitt Romney have passed the test, so only these two names will be on the ballot in the Virginia Repblican Presidential Primary to hbe held on March 6th.

After the fact, RPV announced that anyone who wanted to participate in the taxpayer-financed primary election would first have to sign an oath promising to support the eventual republican nominee in the November election.

"In order to cast their ballots in the GOP nominating contest, Virginians will have to sign a form that says, “I, the undersigned, pledge that I intend to support the nominee of the Republican Party for president,” according to the Richmond Times-Dispatch, which first reported the move.

On Wednesday, the state Board of Elections approved the pledge form, as well as signs that will hang in polling places advising voters of the state party’s policy."

All it takes now if for someone to go to the polls, refuse to sign the pledge, and then be denied the right to vote in a taxpayer-funded election.  Virginia Republican Party makes international news, instant notoreity, just the kind I am sure they want.

I am positively drooling at the prospect.  I am sure that RT would cover such a thing.

Thu, 12/29/2011 - 19:09 | 2020590 YesWeKahn
YesWeKahn's picture

Tyler, you are too gentle. This isn't central planning, this is some criminals, using helping economy as pretext, transfer wealth from the mass to the top earners.

A true central planning would never let this kind of stuff to happen.

Thu, 12/29/2011 - 19:12 | 2020592 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Central planning is anti-democratic dictatorship.  That's about as bad as it gets.

Thu, 12/29/2011 - 21:26 | 2020753 economics1996
economics1996's picture

You are right about the central planning, except the whole propose is to transfer wealth into a few hands.

Thu, 12/29/2011 - 21:42 | 2020766 LowProfile
LowProfile's picture



This isn't a free market, this is some criminals, using helping economy as pretext, transfer wealth from the mass to the top earners.

A true free market would never let this kind of stuff to happen.

Fixed it for you.

Thu, 12/29/2011 - 19:16 | 2020596 s2man
s2man's picture

You will buy equities, and you will be happy.

   - The Office of Morale Adjustment.

Thu, 12/29/2011 - 19:16 | 2020598 kaiserhoff
kaiserhoff's picture

The Jews are going ape shit over Ron Paul.  He must be getting some real traction.

Daniel Henninger, Editorial Director - WSJ - had a sleazy hit piece today.  Dorothy Rabinowitz did a back stab two days ago.They have lost all pretense of balance or sanity, just carrrying water for the Zionists.  This will cost them big time.  I used to have some respect for Paul Gigot, who runs that rag, but not anymore.

Thu, 12/29/2011 - 20:13 | 2020672 General Decline
General Decline's picture

If the Zionist do not approve of you, you will not be elected.

Fri, 12/30/2011 - 02:30 | 2021089 Shineola
Shineola's picture

Let's call these folks by thier proper appellation, Khazars.   They are not decendants of Abraham, neither are they Semitic.  More likely, they decended from the Mongol hordes and "convered" to Judaism, for political reasons, in the 7th century AD.  I don't know how that makes them "chosen", but the real decendants of Abraham probably never left the area called Palestine. 



Fri, 12/30/2011 - 08:38 | 2021230 terryfuckwit
terryfuckwit's picture

your commander in chief Benji will confirm this  on request

Fri, 12/30/2011 - 04:18 | 2021119 Arkadaba
Arkadaba's picture

He is getting traction especially among the young and that is what is scaring them. Today, I saw a post by one of the most "liberal" (define as you will)  persons I know and it was very positive. 

Thu, 12/29/2011 - 19:16 | 2020600 ACP
ACP's picture

Central Planning Bitches, bitchez.

Thu, 12/29/2011 - 19:16 | 2020601 youLilQuantFuker
Thu, 12/29/2011 - 19:19 | 2020604 TheAkashicRecord
TheAkashicRecord's picture

The sum of human knowledge is at our fingertips, such a large disconnect between the decentralized nature of information and the centralized nature of power and planning. 

Essentially Hayek's argument, but now has been taken to the nth degree with the internet.

Thu, 12/29/2011 - 19:25 | 2020611 mayhem_korner
mayhem_korner's picture

What we are witnessing is a titanic battle between the world as it really is and the one central banks need you to believe it might be (if only you would set aside your own perceptions and self-interest).  The fact that volatility has risen is a clear indication that the central bank-inspired anesthesia is no longer as effective as it was in 2009, or even in the QE 2.0 inspired insanity of 2010.


Agree.  Volatility is simply a measure of how reactive the marketplace is to information, irrespective of whether the information is factual.  I like to think of volatility as the "belief spread" - that is, the basis between different views of something's value.  The wider the spread becomes the more volatile the underlying becomes.

With that, this article points to what some refer to as the "reality spread" - the difference between (i) the matrix world's manufactured valuation as concocted by the string-pullers, CBs, paid-for MSM, and the attendant HFT algos that can insta-crash an asset on a mere whiff of hopium, and (ii) real valuations, which are difficult to nail down because they are understood by a dispersed group that cannot easily collaborate to move the markets.  As the reality spread widens, volatility upticks are palpable.  How many times in the past 6-12 months have we seen a major shift in a credit rating, bond yield, commodity price or other indicator that led us to watch very closely the ensuing 48 hours?  That is to me the indication that the pendulum is in fact a wrecking ball scraping some of the matrix walls.

It's not going to settle down anytime soon, because the broken things won't be fixed.  Just the slow but eventual dissipation of the fog around reality for the masses.

My 2 oz.

Thu, 12/29/2011 - 19:26 | 2020612 Sean Fernyhough
Sean Fernyhough's picture

Irving Fisher failed to predict the crash, in fact he advocated against its possibility right through to less than 2 weeks before "Black Monday" in 1929.  As a result he lost a fortune.  So, unlike Bernanke he had significant skin in the game.  And also unlike Bernanke he changed his theories in the light of evidence.

The fact is that the post crash theories of Irving Fisher have largely been ignored by the mainstream.  Almost 90% of the over 1,200 citations of Fisher in academic journals from 1956 were references to his pre-Great Depression works.

So that proposition in the article is wrong.

Bernanke's wet dream economist and supposed expert on the Great Depression is the prize Monetarist idiot Milton Friedman.

Markets have emergent behaviours that cannot be understood by looking at an individual participant in isolation. The fallacy of composition is one aspet of that more general chaacteristic. And, in fact, Adam Smith had far more sense than the article gives him credit for, witness for instance his advocacy (in opposition to Bentham) of a legal limit to the rate of interest that could be charged on a loan on the basis  that "Where the legal rate of interest,on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors... A great part of the capital of the employed with advantage."

So the article is wrong in that respect.

I stopped reading at that point.  Too many mistakes.




Thu, 12/29/2011 - 19:42 | 2020630 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Deflation: Making Sure "It" Doesn't Happen Here

-Remarks by Ben Bernanke

Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level.

-The Uninformed Ben Bernanke

Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

-The Admiring Ben Bernanke

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

-The Alchemist, Ben Bernanke

Thu, 12/29/2011 - 21:31 | 2020758 economics1996
economics1996's picture

Irving Fisher made a lot of mistakes and in my opinion, never understood money and markets.

Fri, 12/30/2011 - 17:40 | 2022564 Sean Fernyhough
Sean Fernyhough's picture

Irving Fisher changed is views when the facts changed - how many economists do that?

Fri, 12/30/2011 - 07:30 | 2021187 BigJim
BigJim's picture

In terms of economic thought, Adam Smith was actually several steps backwards in many respects. He advocated the Labour Theory of Value, for instance, which had already been dissected and dismisssed by the Scholastics hundreds of years prior. But because he wrote in English - as opposed to the Latin, Spanish and French of earlier, more advanced economics thinkers - his works were more widely read throughout the Anglo-saxon world, which, undergoing expansion and ascendency, spread his thought far and wide.

It's not up to the government to tell me (or anyone else) how much I can charge when renting my capital out in a voluntary transaction with a borrower. If I'm charging over the market rate, the borrower can find someone else to borrow from at a lower rate. And if he can't find someone else, then he's out of luck - no one wants to risk their capital with him. And almost certainly for good reason.

I suggest you go back and read the rest of the article. You have a lot to learn, grasshopper.

Fri, 12/30/2011 - 17:39 | 2022562 Sean Fernyhough
Sean Fernyhough's picture

"It's not up to the government to tell me (or anyone else) how much I can charge when renting my capital out in a voluntary transaction with a borrower. If I'm charging over the market rate, the borrower can find someone else to borrow from at a lower rate. And if he can't find someone else, then he's out of luck - no one wants to risk their capital with him. And almost certainly for good reason."

And from that position you get banks using their sub-prime subsidiaries to maximise loans to people who they know cannot afford to repay precisely because they can be charged a higher rate of interest.  Predatory behaviour.

Thu, 12/29/2011 - 19:35 | 2020621 CrashisOptimistic
CrashisOptimistic's picture

This is more or less logistical bullshit.  Yank this article.

There is volatility because volume has collapsed and only computers are trading, and they react and over-react to each news item that crosses the wire.

The rest is hand waving.

Thu, 12/29/2011 - 21:48 | 2020771 lewy14
lewy14's picture

If anyone has any funds with this guy, yank them too.

I willingly pay that cost [of leveraged inverse funds] because I have no concrete idea when another fit of sustained selling will actually take place, but I have more than an inkling that it will.

OFFS. This guy puts a hedge on with no idea what it really costs... no clue how to trade other hedging vehicles... not qualified to run money in any universe. Full stop.

Thu, 12/29/2011 - 19:47 | 2020628 disabledvet
disabledvet's picture

All analysis starts with one of the greatest questions ever "it all depends on what the meaning of" Since we all are forever "shooting in the dark" with any this and pretty much all before it and probably all after it...shifts to "forecasting" then before we state anything we must ask AND ANSWER "what's going on in the first place." even a cursory reading of this missive begs the question "where is the data?" sure "people have points of view" How is this author espousing anything other than HIS point of view then? For me I stare at a chart of the 10 year treasury and look at it like I'm looking at a Rothko. First off I say (to myself) "gee I'm glad when I gave my two cents the guy in charge ignored me." and then I "go to work"'cuz clearly all the blow horns have been telling me "ignore that 10 year just like we do!" I guess the best explanation I can give at this point of my predicament is "somewhere inside this sell side show boater is an asset manager lurking"--but it takes an enormous amount of patience...and an inner calm...something along the lines of "don't worry, we're not Goldman Sachs. We eat our own cooking. We will not steer your herd into the abyss just so we can have a slab of beef "on the cheap."

Thu, 12/29/2011 - 19:43 | 2020629 Mr Lennon Hendrix
Mr Lennon Hendrix's picture


Thu, 12/29/2011 - 19:43 | 2020632 johnjb32
johnjb32's picture

Listen to Mike Ruppert and Joe Rogan talk about this and so much more:

Thu, 12/29/2011 - 20:11 | 2020667 youLilQuantFuker
youLilQuantFuker's picture

Is he crying while Rogan is tripping on medicinal mushrooms?

Thu, 12/29/2011 - 20:23 | 2020688 TheAkashicRecord
TheAkashicRecord's picture

Love Rogan's podcast, long time listener

Thu, 12/29/2011 - 19:46 | 2020637 non_anon
non_anon's picture

if I'm here, where's Waldo?

Thu, 12/29/2011 - 20:05 | 2020661 fonzanoon
fonzanoon's picture

ABC news lead story was about how next year there would be 177k new jobs created per month. How females were more prepared for these jobs because they went back to school (debt) during the recession which is now obviously over.

 The next story was on how packed disney land is in Florida (this may have been NBC). Their example was a family who had not been on vacation in 10 years and barely scraped the money together to go.

They did a quick market check to show how improving economic data sent the market up over 100 points.

Joe idiot must really think all is well.



Thu, 12/29/2011 - 20:25 | 2020693 TheAkashicRecord
TheAkashicRecord's picture

When you have a foregone conclusion, it's easy to hand-select data to support it


Thu, 12/29/2011 - 20:14 | 2020670 Duffminster
Duffminster's picture

With the addition and help of central banking, we have entered the new "gilded age" in which government works only for giant corporations and works along with the shills for those interests in government we still for some reason call "representatives" of the People of the United States, to ensure as little actual capitalism (and actual competition) as possible while doing just about everything possible to ensure that good jobs and wages are not created so that the giant corporations can play out their cruel fantasy of Tyrants over the masses and use reverse psychology to blame the "woes" of the middle class and poor on the already weak social safety-net, unions and the like.

In the meantime, the central banks and their operative bullion banks (custodians of the largest gold and silver ETFs) in the UK and and US scare the weak longs out of their gold so that China and others with an accurate long view can swoop in and place orders for devivery at these ridiculous low prices.  Even as the media shills for the central and bullion banks claim gold's run is "over" and "blah blah blah" the fact remains, gold has once again handily outperformed the major stock indexes this year, proving for the year, the decade and the millennium that the best hedge against fiat currency, backed only by debt, backed only by fiat currency remains real money, the ancient bi-metal standard, gold and silver.

With silver at nearly a 50% retracement from the secular fundamental based long term bull in monetary metals, silver looks to have extremely strong support in the $24 to $25 range and is probably (in my opinion) a super good bet going into 2010 and QE3 for a major run up.  What do I know.  I do know gold has extremely strong support at $1500 and I'm a buyer at these levels.


Thu, 12/29/2011 - 20:13 | 2020673 sangell
sangell's picture

Liked Jeffrey Snider's writings at Real Clear Markets. Hope he writes more for Zero Hedge.

Thu, 12/29/2011 - 23:00 | 2020886 earleflorida
earleflorida's picture

to much filler

Thu, 12/29/2011 - 20:20 | 2020684 Georgesblog
Georgesblog's picture

So, the economy is a plane that has controls that work backwards, sometimes, or not at all. I'm glad the Fed knows that.


Thu, 12/29/2011 - 20:31 | 2020701 max2205
max2205's picture

There is no free market. Never was

Fri, 12/30/2011 - 07:33 | 2021188 BigJim
BigJim's picture

Indeed. But that doesn't mean we shouldn't be striving to bring one about.

Thu, 12/29/2011 - 20:35 | 2020703 kevinearick
kevinearick's picture

giving govt/corp relatively free money, and expecting free markets, is and always has been stupid...can't wait to hear the arguments for negative interest rates again. Supply-side accelerated the problem Newt. Can California possibly find more stupid ways to spend. Maybe replace the vehicle fleet every year, and stop all traffic all the time by placing them in the roadway? Market inelasticity tells all; follow it back up the chain to the integral failure.

They can say anything they want, but they cannot change the reality of a demographic crash. The majority is dysfunctional and each one must be surrounded by functional behavior to improve. Good luck with that. They push out and grow the tails.

Why can't vehicles be easily and immediately recycled?


Thu, 12/29/2011 - 21:20 | 2020747 grid-b-gone
grid-b-gone's picture

Dear Central Planners,

The masses can't do the math, but they get the jist. If you are only going to pump equities by 1% per year, yet erode currency by 5-10% per year, they will pay off debt with the debased currency before adding new spending.

If your unemployment rate were believable, average Joe might be calm enough to follow your script.

If your inflation numbers were believable, average Joe would be more likely to spend.

If average Joes could depend on their pensions and Social Security, they'd be inclined to add new spending and pay off less debt.

Somehow, Joe knows you want him to get your credit default swaps back up to the 100 cents on the dollar that Hank Paulson said they were worth at the top of the 2008 market. Joe does not believe your CDS were worth 100 cents on the dollar in 2008, and most will never recover.

They are amenable people. Most Joes accept direction for every day of their entire careers. They will follow if your design is right. Have you considered bringing in Temple Grandin as a consultant?

You, central planners, work with OPM every day. You tend to overpay.

Joe has only worked with HOM (his own money). He spends his life avoiding inflation, not trying to make it appear. He gets no bonus on inflated or contrived numbers.

When you take care of him, he takes care of you. This is what Volcker told you three years ago. Now you are three years behind.

Joe will continue to pay down his 6% mortgage, 6% school loans, and credit cards because your offer is a lousy deal.


Thu, 12/29/2011 - 21:34 | 2020761 Caviar Emptor
Caviar Emptor's picture


Joe and Jane are beginning to think of a casual dining establishment like Red Robin as 'aspirational'. There isn't much time or opportunity to ponder these decisions anymore when each paycheck disappears on necessities. 

Fri, 12/30/2011 - 07:35 | 2021189 BigJim
BigJim's picture

++ Nice!

Fri, 12/30/2011 - 14:46 | 2022108 unnamed enemy
unnamed enemy's picture


well said

Thu, 12/29/2011 - 21:53 | 2020775 gwar5
gwar5's picture

Re Central Planning and the Banker Sovereign Global Superclass... here is plain spoken former FED VP, per his WSJ article, explaining why Bernanke is not telling the truth when he says he is not bailing out the European banks, courtesy CNBC(?). » The Federal Reserve’s Covert Bailout Of Europe



Thu, 12/29/2011 - 22:10 | 2020789 batterycharged
batterycharged's picture

LMAO @ "advocates of a free market"


Most "advocates of a free market" are folks that want to make millions on the backs of others or sit at home and cash in on the stock market.


A free market means COMPETITION. A free market means LOW MARGINS.

A free market means you fucking work for every dime you make.

I LAUGH at all the supposed free marketeers. You just want a system that guarantees you RICHES while sitting on your fucking ASS.

You don't want COMPETITION or you'd have to come to the realization that there are 1 million unemployed people that would and COULD do your $100,000/year job for $30,000.

So let's cut the fucking crap here, can we? What you want is the old-boy network, winner-claims-all, UNCOMPETITIVE bullshit where you don't work for your income but make unwarranted sums of money because THE FUCKING SYSTEM IS RIGGED IN YOUR FUCKING FAVOR.

Thanks for listening.

Thu, 12/29/2011 - 22:31 | 2020830 nmewn
nmewn's picture

"Most "advocates of a free market" are folks that want to make millions on the backs of others or sit at home and cash in on the stock market."

I think you're confusing the long deceased day trader with someone interested in economics.

But thanks for listening ;-)

Thu, 12/29/2011 - 22:35 | 2020837 bobert
bobert's picture

Interday or intraday?

There are a lot of the latter still around :)

Thu, 12/29/2011 - 23:33 | 2020949 nmewn
nmewn's picture

lol...25k in the hand is worth 26k in the bush.

Fri, 12/30/2011 - 11:25 | 2021190 BigJim
BigJim's picture

...So let's cut the fucking crap here, can we? What you want is the old-boy network, winner-claims-all, UNCOMPETITIVE bullshit where you don't work for your income but make unwarranted sums of money because THE FUCKING SYSTEM IS RIGGED IN YOUR FUCKING FAVOR.

That's the system we have now, meathead. If we were happy with it, why would we be complaining about it?

Of course, there are advocates of 'free markets' who want a Fed backstopping their losses. But here's a clue - they're not really 'free-market' advocates.

Thu, 12/29/2011 - 22:11 | 2020791 DannyTX
DannyTX's picture

I feel more confident to ride out my 2X QID now.  Thank you very much for this article!

Thu, 12/29/2011 - 23:02 | 2020890 earleflorida
earleflorida's picture

please come back in a week or two?

Thu, 12/29/2011 - 22:13 | 2020792 bobert
bobert's picture


I'm getting lazy.

I didn't read a word of the article, however, enjoyed your recap very much!

Thank you.

Thu, 12/29/2011 - 22:25 | 2020819 nmewn
nmewn's picture


"There are no logical deductions from economics no matter how much math is applied.  It is, and will remain, a subjective interpretation of events.  Even the vaunted Fed and its accumulation of Ivy League PhD’s performs no leaps of logic."

sounds like a great place for the uninformed to lose a lot of fiat.

I don't know if I would call the Fed "vaunted"...with their track record of wage/labor misery...but I'm sure the author was being playfully facetious ;-)

Thu, 12/29/2011 - 22:40 | 2020847 bobert
bobert's picture


My econ degree has a BS behind it I believe rather than BA, however, I've always enjoyed the theory of economics more than the math.

An artistic abstract kind of guy am I.

Thu, 12/29/2011 - 23:19 | 2020922 nmewn
nmewn's picture

I suppose then, we would be kindred spirits.

For myself, I think this is a seminal post by the author. This is the definition of us & them.  Its not they who make economies, it is us. All they control is the medium of exchange...nothing else.

Fri, 12/30/2011 - 00:37 | 2020992 bobert
bobert's picture


And they have a lot of it to control.

I read the article after seeing your comment and agree that it was worth the reading!

Up with volitility!

Thu, 12/29/2011 - 22:48 | 2020858 earleflorida
earleflorida's picture

FWIW Dept:

here's where we are on a compressed timeline in history, fast-forwarded from 'past-to-future', and back, 'future-to-past' :

1928 - 1939 [12 long arduous years, fraught with despair, and hopelessness, purged only by what man does best -WAR!]

2008 - 2012 [5 seemingly endless, and tenuous years of false hope, and recycled papier`mache fiat kite-flying 'fairy'tail`d' FED-up guidance via a flamed-out indoctrination proclamation!] 

compress the allotted time slots above and this is where we've been at, and where we are going,... deja`vu?    JMO/ Follow the dated timeline 1928-1939 ONLY, to find your destiny???

thankyou tyler

Fri, 12/30/2011 - 08:07 | 2021194 BigJim
BigJim's picture

...1928 - 1939 [12 long arduous years, fraught with despair, and hopelessness, purged only by what man does best -WAR!]

I think you'll find that the period from 1939 to 1945 was also fraught with despair and hopelessness. Possibly rather more so than the period beforehand, when people throughout Europe weren't watching their loved ones being starved and shot on a daily basis.

The Great Depression didn't end in 1939; it ended in 1945, when Truman repealed most of FDR's disastrous command-and-control policies and we stopped vaporizing huge percentages of our annual production by blowing things (and people) up. And that was only in the US; poverty in Europe extended for decades, GDP 'growth' notwithstanding.

War is a disaster for everyone not in the MIC. Don't be fooled by GDP 'growth' - it has very little to do with actual, REAL, societal wealth.

Thu, 12/29/2011 - 22:55 | 2020869 shanearthur
shanearthur's picture

Prior to reading sites like this, I always knew something wasn't quite right with the financial world. I didn't know how to explain it back then, but I knew something was off. I rode the Internet bubble. We got thousands of shares and were bought out twice. Our company went public and everyone at work was living in a land of Oz where our stock could never go down. The Internet could never have any flaws or drawback. I knew from company meetings that we didn't make enough money to justify the craziness. I sold out just in time. The rest of our company didn't and their options were underwater and worthless. Soon after in 2000, we all were laid off. I bought a house for 265k - 5.5 acres, 5 bedroom house, 4 car garage. While everyone was flipping houses and using their homes as credit cards, and saying the housing market could never go down, i held back on refis and shit like that. I just knew something was wrong.

Now I understand why.

The Federal reserve needs to go in my opinion. This author did what appeared to me to be a fantastic job of outlining the history of this mess. What confuses and frustrates me though, is people here are saying this guy doesn't know what he's talking about. Again, I'm not a trader and I'm still trying to learn all the terms I see here, but I don't understand where this guy is wrong.

And after reading this, I'm not so certain our congress knows that the hell is going on financially. Do they EVER get the ZeroHedge view brought to their attention? I'm guessing not.

My closing thought is, I hope the readers of zerohedge go out of their way to email talk show hosts and bloggers and refer them to articles here on a regular basis. Eventually, they will do so and the word will get out more. I heard Rush mention this site a month or so back. We need more of that.

Fri, 12/30/2011 - 01:11 | 2021045 Terminus C
Terminus C's picture

You listen to Rush?

Thu, 12/29/2011 - 23:14 | 2020904 steve from virginia
steve from virginia's picture

 The Federal Reserve, in cooperation with global central banks, Wall Street and the interbank wholesale money marketplace, simply substituted credit for earned income. And the reason is also very simple, because debt accumulation is far more easily manipulated.

"And the reason" is because 'earned income' is a myth like leprechauns. Earnings are debt taken onto the public's account in the form of currency.

If you make something yourself by your own hand you have earned something, otherwise you borrow the efforts of others (with little intention to pay them back).

Since the Depression ended the US has never 'earned' anything, it has fed off the efforts of others like a leech. 'Others' includes our children and grandchildren. Lucky that they don't murder us in our beds.

Thu, 12/29/2011 - 23:21 | 2020930 Stuck on Zero
Stuck on Zero's picture

I suspect that volatility will finally go to zero when the central powers own 100% of the market.

Thu, 12/29/2011 - 23:39 | 2020960 Atomizer
Atomizer's picture

Central Planning is another diluted effort in extending the nanny state

I always enjoy reading their bullet points

1. Abortion - Oops, the government needs to bail me out for my mistake.

2. Birth Control - Should of thought about this before I got pregnant. He told me he would pull out.

3. Morning After Pill - I cannot afford birth control, my food stamps don't cover this expense.

4. Sexually Transmitted Diseases (STDs) - If the government would have educated me better & given me monies to buy condoms, birth control. My cunt wouldn't be oozing/burning. My attorney told me to get a free government pregnancy test, to see if I can get a 18 year paycheck out of this one night stand sugar daddy.


Fri, 12/30/2011 - 02:41 | 2021097 bobbydelgreco
bobbydelgreco's picture

a great article one of the best; if you don't think another big collapse is coming in your life time it means one of two things your either wrong or expect to die soon

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