Guest Post: Enjoy The Central Bank Party While It Lasts

Tyler Durden's picture

Submitted by Peter Treadway of TheDismalOptimist

"It is patriotic to accept to pay a supplementary tax to restore the country.”

-Francois Hollande, the Socialist Challenger for the French Presidency, after proposing a 75% marginal   tax rate on earnings of over one million euros per year

“Patriotism is the last refuge of a scoundrel.”

-Dr. Samuel Johnson, distinguished eighteenth century man of letters and author of the influential A Dictionary of the English Language

“If this plan saw the light of day, it would end in catastrophe for French football."

-Frederic Thiriez, head of the French Professional Football League, in response to Francois Hollande’s tax proposal

Don’t Fight the Tape – But Prepare for an Unhappy Ending

Central banks are printing money all over the world. New names have been given to what is really an age old phenomenon. Desperate governments have traditionally debased their currencies when they have no other way of financing their deficits. Quantitative easing, LTRO, Fed/ECB swaps, whatever. A new technocratic lexicon has been invented to cover what is really a time honored expedient of debasement and paper money printing.

Investors for the moment almost have no choice. Get out the surfboard, hitch a ride on the global tsunami of freshly minted central bank money and get long equities. In 2012 equity markets have rallied everywhere, particularly emerging equity markets, and will probably keep doing so. Short term interest rates are near zero and likely to stay that way for the rest of this year. Investment managers are tired of telling their clients that they earned zero and had to pay a fee anyway. The European crisis has been overcome by massive LTRO money printing and a friendly “borrow all the dollars you want” swap agreement between the Fed and the ECB. And the US is in the midst of a tepid recovery (better than nothing!) Lastly, China seems to be slowing but not crashing.

Money must head for risk assets. Tough luck for defined benefit pension funds and retirees who until recently lived off of nice, safe bond income.

Bernanke’s little head fake of last week in not mentioning a QE3 can be taken with a grain of salt. The US has another $1.3 billion projected deficit to be financed and the fragile US recovery cannot stand a rise in short rates. A war with Iran would make the US deficit so much worse. The US unemployment picture is not as pretty as the recent decline in the official U3 rate to 8.3 percent would suggest. For one thing the Labor Force Participation rate continues to move downward. The broader and less quoted U6 rate which includes people who have given up looking for work for January is 15.1 percent. Bernanke knows the numbers. And recent Treasury data show some fall off in Chinese buying of US Treasury securities. US short rates will not rise and Treasury auctions will not fail. Not if the Fed can help it. The Fed will print.

Historically, countries faced with financing wars would print paper money and eliminate convertibility into a commodity such as gold, silver or copper. This happened over and over from Sung Dynasty China facing northern invaders, to the Napoleonic Wars, to the American Civil War and of course to World War I.

But this time it’s not wars but democracies’ underlying tendency to inexorably move to bankruptcy which is the culprit. Citizens vote to obtain through the political process what they cannot obtain in the market. Modern democratic governments are expected to socialize risk and redistribute income from the smarter (you would probably say luckier if you are on the left) affluent minority. The welfare state grows and grows, its costs disguised in the complexity of the budget process and ignored by the public anyway. Public sector unions, whose existence and freedom of actions politicians elected by universal suffrage found impossible to oppose even though they knew better, have accelerated the process. We vote for you, you reward us, is the working relationship most public sector unions in most democracies have with their politicians. No greater conflict of interest hath any country. The public sector debts have built up. And nobody has to bother lifting the fetters of a commodity money conversion requirement that was so important in the age of the classical gold standard before WWI. Richard Nixon cut the last of those golden fetters in 1971 when the US ceased to honor its commitment under the Bretton Woods Agreement to sell gold for dollars at a fixed rate to other central banks. Since the demise of Bretton Woods, every central bank in the world can be its own ATM machine. And indeed they have.

So far the world’s central banks have been “lucky”. Thanks to the prior global bubble ending in 2008 and the realization that the so-called advanced countries are reaching the end of their borrowing capacity, the world is in a massive deleveraging mode which tends to be deflationary. For the moment the central banks can get away with printing all the money they want without massive increases in consumer price indexes. The public doesn’t connect increases in prices of commodities like gold or oil with the current bout of money printing. But if history is any guide, this money printing will matter and the age of deflation and deleveraging will be followed by an age of inflation. Deleveraging or no, entitlements already promised will grow inexorably larger. Inflation of course is one way governments can effect major defaults on sovereign debt and unaffordable entitlements.

Regarding the global equity markets, I am seeing various forecasts from vaunted gurus ranging from imminent collapse, to rally in the first half of 2012 then followed by collapse to rally all year. I lean towards the last view. But with a very low confidence level. And with a fear that the party won’t go on forever.

The American Problem

This week’s New York magazine carries an article by Jonathan Chait entitled “Why Republicans Fear This Year Could Be Their Last Real Shot.” The article lays out how the growing demographic ascendance of African American and Hispanic populations versus the heretofore dominant white population spells long run catastrophe for the Republicans. According to the article, each presidential election sees the non-white proportion of the vote grow by two percent.

This demographic shift along with the overall aging of the population and decline of the worker/ beneficiary ratio (not mentioned in the New York Magazine article) will intersect with the coming need to deal with America’s burgeoning sovereign debt and entitlement crisis. Republicans in theory stand for smaller government, lower taxation and faster economic growth. Practice is another matter—Republicans often do the opposite of what their supposed ideology would recommend. The underlying populist dynamic of universal suffrage forces them to join the Democrats in expanding government and socializing risk. Today’s Democrats stand for bigger government, higher taxation and don’t worry as much about economic growth.

The coming American sovereign debt crisis—whether it’s next year after the election or ten years from now—will involve some mix of higher taxes and defaulting or reneging on government debts and entitlements. Just what the solution mix will be in terms of overt default/reneg, inflation, financial repression and tax increases remains to be seen. But unlike many other more homogeneous countries which face the same problem, the American version will in a part take on a racial/ethnic hue, i.e., older and more affluent whites vs. African Americans, (non-Cuban) Hispanics.

The data show that Hispanics and African Americans on average tend to be underperformers when measured by educational achievement or family incomes. Whites and Asians are outperformers. Obviously this kind of divide is not a healthy situation. Just why these gaps persist is a matter for educators, historians and policy makers, who unfortunately thus far have yet to come up with an uniformly agreed upon explanation much less a solution. Discussions of these issues often leads to anger and recriminations. But all that matters for the purpose of forecasting government spending and the conflicts that lie ahead is that the assumption is reasonable that this underperformance will continue for the intermediate future.

Presumably underperforming groups are greater users of government services, especially those programs like food stamps and Medicaid which are pure wealth transfers not camouflaged by phony trust programs like that financing Social Security. And, as the Republicans are fond of pointing out, only fifty percent of Americans pay income taxes. I have not seen data breaking this out along racial/ethnic lines but it is likely the profile of non-income tax payers and the income tax payers is quite different.

A preview of the way the coming American budget disaster and race will intersect in America can be seen by the reaction Newt Gingrich got when he labeled President Obama a “food stamp president.” Gingrich was himself labeled a racist for this although he never explicitly mentioned race. But his accuser implicitly assumed that minorities were the major food stamp recipients and that this was obvious to Gingrich.

The coming battles over solving the problems of the bankrupt American government will not be pretty. It will be a bit more difficult for an American president to preach patriotism to the affluent in these circumstances. Although, if there is a war with Iran, he might try.

The Future – There Is a Bright Side

I have been accused of being too dismal, and not optimist enough. So allow me to make a few at least semi-optimistic points:

1.     For investors globalization and the acceleration of technology offer significant rewards. I recommend to everyone a book by Ray Kurzweil called The Age of Spiritual Machines. While you might not agree with Kurzweil’s views on artificial intelligence, the central theme of this book is his law of accelerating returns. Under this law, technology is a continuation of human evolution and technology itself is speeding up at an accelerating rate. A more prosperous and healthier world lies ahead. As I see it, all those Chinese and Indian and other “third world” brains that have recently been added to the global economy will benefit everyone. And provide investment opportunities for Western investors.

2.     The world is not running out of energy or food. Technology is taking care of that and again investment opportunities will abound in these areas. In the energy area fracking and horizontal drilling have opened a bonanza in terms of natural gas and oil. If only the US and China would stop wasting money on so-called green energy boondoggles like solar and wind and ethanol in the case of the US. And again in the case of the US, get rid of arbitrary environmental obstacles. And let the market made the investment decisions! In the case of food, biotechnology will feed the world. Serious studies don’t find the Franken food scares to be valid. Again. Let technology do its work and let the market decide!

3.     A major fiscal crisis a la Greece and Iceland is coming to the advanced countries including Japan. Investors should be preparing now for the eventual major debasement of the dollar and the euro. Look to place funds in alternative assets like gold and in countries which won’t have a fiscal crisis like Australia, Singapore and Russia. There are alternatives.

4.     The US has been the land of technological innovation and economic progress. The world has benefitted.   It would be a global tragedy if this were to change. But there is a risk that the US fiscal crisis will be “solved” by more taxes, financial repression and cutbacks in services that that the government should be providing. The cutback in funding to the world renowned University of California system is an example of a bad decision. Education is cut back in order to pay outsized pensions to retired California workers. Parenthetically, this hurts members of minority groups for whom the University of California system was one avenue out of “underperforming” status. (Fortunately for-profit education may fill some of the gap.) US technological and military superiority is threatened not by China or India but by US fiscal profligacy. It is up to the US and the other advanced countries to make the right choices to deal with the fiscal crisis. It will not be easy but they can do it.

5.     Capital goes where it is welcome. This is true not only of physical and financial capital but also of human capital. It is a big globalized world out there. In the past the US was the big welcoming country. It still can be. But if the US and other advanced countries “solve” their fiscal problems with taxes and other growth stunting measures, then well-trained professionals and young people from these countries will think about emigrating to countries that don’t have major fiscal problems and won’t try to squeeze them for their last penny. Singapore and Australia are two countries that come to mind. Already it appears that Greek citizens are emigrating to Australia, as they did in the past. Smart people don’t have to stay where they are exploited. Smart countries will try to attract them. The Statue of Liberty in New York Harbor has a plaque that reads “Give me your tired, your poor.” That’s not the new migrant. Maybe someone will add a new plaque, somewhere at a spanking new airport in what used to be called a third world country or an advanced country that made the right choices. “Give me your brains, your ambitious.”

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evolutionx's picture
Moral and financial decadence

A deluge of an unprecedented magnitude is both inevitable and imminent. The consequences of the economic and political mismanagement will have a devastating impact on the world for a very long time. And the consequences will touch most corners of the world in so many different areas; economic, financial, social, political and geopolitical. The adjustment that the world will undergo in the next decade or longer, will be of such colossal magnitude that life will be very different for coming generations compared to the current social, financial and moral decadence. But history always gives us lessons and the one that is coming will be necessary and eventually good for the world. But the transition and adjustment will be extremely traumatic for most of us.



SheepDog-One's picture

OH sure...'whats coming may be uncomfortable, but will be for our own good in the end'....complete garbage unless you belong to one of the 13 central banking families that own the world.

No mismanagement about it at all, all planned from the start.

trav7777's picture

yes, of course, rather than continue to profit from a system of banking built on growth, it was always their plan 400 years ago to kill everyone off.  GTFO here.

SheepDog-One's picture

'Banking built on growth'....AHHH HA HA HAAAA Wow youre delusional, and obviously dont have the slightest clue of what central banking is and its purpose.

knukles's picture

And ya'll ready for the next meme...
Another fear based meme to scare the peasanrty into relinquishing more freedoms, surrendering a lrager proportion of their treasure to TPTB?
This week on the Science Channel program "Through the Wormhole" Morgan Freeman is hosting one about Not The Probablility of First Contact, but whether the little Green Men/Grays/whateverthefuck will be naughty or nice.... and you can bet that it'll be Hostile Little Mutherfuckers.
The New War on Terror, from 30,00 light years.

Now, the groundwork has already been laid.  The UN's nomination of a person and establishment of an office to serve as point for the "Visitation", the endless programs like "Ancient Aliens", the meme and conspiracy formentation from the foofighters and Roswell to the present, let alone speeches buy the likes of Kennedy and Reagan in front of the UN no less, comiserating upon the wonders of man's bonding upon the lifebost oppositie the alien invaders....
Come on, even Paul (Fuckmewhat'snextwiththishit) Krugman has speculated recently how the Threat would Goose the Economy....
Being set up, folks.
(Hell, Tyler even made fun of the whole sthick with the Imperial Death Star.)

Continued raping and pillaging of the wealth of the peasantry by the Business/Government Leviathan.

Anybody esle gotten thier private medical insurance renewal notices recently?
Another fucking by the Gubamint.  Coverages disappearing, rates skyrocketing, all under the caveat in the cover letter's note that rates have to go up and may continue to do so due to uncertainties with respect to Health Care Legislation.

Fuck Everybody

We Are Prey.


Harlequin001's picture

'Coverages disappearing, rates skyrocketing, all under the caveat in the cover letters that rates have to go up and may continue to do so due to uncertainties with respect to Health Care Legislation.' That'll be nothing to do with printing money then?

But seriously, "Aincient Aliens"? Does anybody believe this shit?

I mean I know Star Wars was real 'cos I was there, but seriously...

tarsubil's picture

To me aggressive aliens makes no sense. Perhaps to a peer but not to us on this tiny insignificant planet. The most interesting thing on this planet is life and humans. Why would aliens come here and destroy those things? If there was some threat forseen if we have the potential to become peers, then they'd just ruin our economy through banking. Do the blood petri dish test from The Thing on Ben Bernanke and we'll know.

margaris's picture

thank you.

all conflicts on planet earth can be explained by its limited area and scarce ressources:

after all planet earth is like a limited 2d chessboard thats why conflict is inevitable.

but now imagine a limitless 3d universe. There are so many ressources, so much abundance, there are no boundaries. you will never feel threatened by the "borders" of someone else. There is always a "borderless infinity" around you where you can easily expand to.


Ahmeexnal's picture

2.     The world is not running out of energy or food. Technology is taking care of that and again investment opportunities will abound in these areas. In the energy area fracking and horizontal drilling have opened a bonanza in terms of natural gas and oil.


Shhhh! We don't want the peak oil mullahs to suffer a sudden heart attack!

trav7777's picture

and yet oil already peaked, you stupid fuck.

Ahmeexnal's picture

Ahhh...trav the loser idiot.  The peak oil mullah.

All the girls who dissed you prefered a real man (hispanic/black/asian/native american) and that's why you hate them so much.

Check your facebook!

Think for yourself's picture

It's not anybody's fault but yours if you can't conceive an arctan curve stabilizing towards a new equilibrium point.

I'll even give you a hint.

centerline's picture

LOL.  You forgot the /sarc.  and, Yup.  That transition is going to be bitch considering our economies are based on perpetual and exponential growth.

Everyday hear the MSM talking about getting "economies" growing.  Got to get 'em growin.  Amazing that no one stops to really think about that.  About what it means.  About how one keeps the system moving forward.  About how systems keeps the hamsters on the wheel.  

trav7777's picture

I know exactly what central banking is and its purpose, you paranoid jackfuck.

It's purpose is NOT to fucking kill off everybody, moonbat.

tickhound's picture

After breezing through the comment section on "The Hill" regarding high oil prices, and reading the HOLY FUCK that is the comment section, I gladly return to the safe feeling I get from the zh forum... A place where most are knowledgeable and they have big dicks too.  And that's ok with me.

The comments in the pasted article are enough to make you truly say, "Fuck it, its hopeless"

Think for yourself's picture

Holy mother of god...

It cannot be unseen!

nugjuice's picture

TBH Trav you have a point. Some people give too much credit. On one hand they call the leaders stupid, and on the other hand accuse them of organizing and perpetuating the most massive conspiracy of all time. It's either one or the other...can't be both. I'm leaning towards stupid.

Silveramada's picture

profit? that's not the issue... control is the prize, they own all the money supply already

trav7777's picture

africans and hispanics will give us societies that resemble where they came from.

They ALREADY DO.  Detroit has more in common with Johannesburg than with Reykjavic.  Behaviors of people don't change as a result of geography.

This pathologically disgruntled and entitled bloc, fed by all the racial angst pushers, will progressively vote more and more and more for themselves and their sense of self-entitlement will only grow.  The majority population will begin to realize that acting like that generates results.  Gresham's Law.

Either the population that created civilization stands up and defends it or it will collapse.

GeneMarchbanks's picture


Is that the latest NBA import from the Balkans?

Ethics still making you nervous?

knukles's picture

His name is Ray Kavech, he's Canadian, plays for the Flyers in the NHL.

SheepDog-One's picture

OH right 'the hispanics and africans are whats bringing us down'....take your own advice, make like a tree and fuck off.

Hugo Chavez's picture

It is true they bring their culture here. They dont have the puritan, self reliant, individual liberty and limited government tradition that many of us descended from original volonists have.

I speak spanish and have spent time in latin america. They look to government like they look toward daddy. They expect daddy to do things for them. Feudalism runs deep in their souls, but they dont recognize their mindset as feudal, but they believe vasals and leige lords have reciprocal duties and respinsibilities. They love a good master in latin america, but like children try to disobey at times and get away with stuff, still expecting their lords and masters to keep their end of the feudal bargain.

Hugo Chavez's picture

We have enough "real americans" voting the socialist line that we can destroy a beautiful creation without the help of minorities. Our white native progressivists can kill american liberty all on their own.

Harbanger's picture

You're right in part but "they" didn't "bring" their culture here, we changed our culture to match theirs.  Slow cooked liberal culture rot is making us all World citizens or subjects. 

centerline's picture

Isn't there some sort of quote about the road to hell being paved with best intentions.  We keep changing the rules, creating loopholes, accommodating and accommodating on a mission to "be fair."  We wind up naturally in a place that is exactly the opposite.  What a joke it all has become.  Got to say that the "ebonics" thing from a handful of years ago had to be the funniest (and lowest) point in the process of killing American culture.  

AnAnonymous's picture

Isn't there some sort of quote about the road to hell being paved with best intentions.


Indeed, there is such funny quote.

The road to Hell is paved with good intentions.

Quite funny.

Where are the bad intentions? Do they pave the road to hell too?

Do good intentions pave the road to heaven ?

And is the road to heavens is also paved with bad intentions?

Isnt a funny quote indeed?

centerline's picture

The number of people who live off the system in some way (including gaming the system) outnumber those who do not.  It would take generations of constant pressure to change the direction here without going critical mass.  I wager we simply dont have the luxury of that amount of time.

In the end, rest assured that the people themselves will be made to blame.  It will be the last (and ultimate) trick played on the masses.  Both shameful and inevitable.

Alcoholic Native American's picture

Will the population entitled to the position of the creators of civilization please stand up!  Yes oh wize one, I'm pathologically disgruntled about these damned scapegoats fucking it up for us.

They hate us because we created civilzation. We are being persecuted!

You sell a good product trav

trav7777's picture

idiot.  when you have spoiled brat kids that you let behave like spoiled brats, you reap the "rewards" thereof.  You are not persecuted.

Stop twisting shit around into strawmen so you can seem smart.  Fuckin dunce.

You want to be more like africa, bring more africans.  More like latin america, bring more hispanics.  It is as SIMPLE as that no matter how wilfully obtuse you are.

Ahmeexnal's picture

Trav the racist moron, who believes in peak oil, pink unicorns, and Justin Bieber as the epitome of white culture supremacy.


Silver Dreamer's picture

There are an awful lot of "white" poor in America who are lazy and ignorant too.  Ethnic background has little to do with it.  It's cultural perhaps, but it's the culture our government school system and MSM have shaped over a few generations, not that of a person's country of origin.  My family has some of those poor "white" folks in it, and they think they are entitled just like many others.  Collectivism is the "culture" that has ruined America.

Random_Robert's picture

Trav777 likes to evade that simple (yet inconvenient) fact...

I've brought it to his attention many times.

However, I am also fascinated how white people who tend to occupy lower socio-economic niches typically engage in "culture envy" 

It seems tha Appalachian "deliverance" style hillbilly is the only valid and uncorrupted archetype for white poverty.

Everything else is just Eminem or Vanilla Ice. 

AnAnonymous's picture

Collectivism? No, US citizenism.

Offtheradar's picture

Bush said "They hate us for our freedom."

Random_Robert's picture


So naturally the solution is to take all those freedoms away so they will love us.. right?


AnAnonymous's picture

Detroit is such a significant part of the US.

US citizens know well that without this city, all will be all. The rotten apple in the bag of apples...

As history shows, people who've supported, developed and furthered US citizenism, are Indo Europeans, with their star group, the Germans.

Claiming that the latinos, the negroes, the chinks etc have any meaningful influence on the normal course of US citizenism is just US citizenish.

One could have much better chances trying to argue that they were introduced to fit the fall guy part, when things were already so advanced it was useless to hope another outcome than the current outcome.

trav7777's picture


So us citizenship is us citizenshipish?  GFD you are stupid.

AnAnonymous's picture

US citizenship? Where is that?

Please provide the line where I stated that the current situation is the result of US citizenship.

I wrote that the current situation is the result of US citizenism, that doctrine that US citizens like you, fond of dilution of responsibility, label as 'Americanism'

Ad hominems as the only possible answer are so US citizenish.

Grey-Ghost's picture

Check out a quite powerful documentary by Julian Temple - REQUIEM FOR DETROIT.

(do not let Russian domain, confuses you - it's in English and it's worth watching - perhaps the land of the free does not like to promote such a movie; not sure)