Guest Post: The Final Countdown

Tyler Durden's picture

Submitted by Tim Price, Director of Investment, PFP Wealth Management courtesy of Sovereign Man

The Final Countdown


“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” Debt talks “have not produced a constructive response.”

- The Institute of International Finance, January 13, 2012


“The war situation has developed not necessarily to Japan’s advantage.”

- Japanese Emperor Hirohito after the atomic bombing of Hiroshima and Nagasaki, announcing Japan’s surrender to the Allies.


There is a terrible hubris at the heart of mankind. Like every other living thing on the planet we are products of nature, but we consider ourselves to be well above it. We are beset by regular reminders of our vulnerability, but quickly dismiss them off-handedly to a spiritual plane, calling them “acts of God” as if to show that we could never have prevented them.

In a significant essay for Foreign Affairs, “The Black Swan of Cairo,” Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous.

“Although the stated intention of political leaders and economic policy makers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”

There is an analogy from the natural world. In the 1960s and 1970s, mid-western American states fell victim to scores of wildfires. Constant interventions by the US Forest Service appeared to have little positive impact – if anything, the problems seemed to worsen. Over time, foresters came to appreciate that fires were a normal and healthy element of the forest ecosystem.

By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future. Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable fire to come has a far greater store of latent fuel at its disposal.

Economist Murray Rothbard jangled the sensibilities of the Keynesians when he wrote his classic study, “America’s Great Depression:”

“If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery.”

But politicians must be seen to be doing something – like encouraging the construction of a £33 billion white elephant rail link in the middle of an austerity recession.

Not interfering with the market’s adjustment process is simply allowing Schumpeterian “creative destruction” to operate, and cleanse the forest. But that process is anathema to well-compensated entrenched interests that suckle from the teat of the State. Banks, for example.

So while “laissez faire” would accelerate any banking crisis and shorten the resultant economic contraction, it would reveal the identity of too many naked swimmers when the tide retreats. Instead, courtesy of highly paid lobbyists, we get a long drawn out depression. The example of Japan’s zombie banks from the 1990s is still fresh, but ignored in the west.

Rothbard identified the ways in which government can hobble the adjustment process:

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments which, in their turn, will have to be liquidated in some later depression. A government’s “easy money” policy prevents the market’s return to the necessary high interest rates.

3. Keep wage rates up.

4. Keep prices up.

5. Stimulate consumption and discourage saving. More saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved capital even further.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment “insurance”, relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

An iatrogenic illness is one caused by the doctor himself. The economies of the west now face policy measures of the sort highlighted by Rothbard that are stated to be in our interests, but which are more likely to do harm to the patient and prolong the recession.

Taleb uses the example of the turkey before Thanksgiving. The turkey is fed for 1,000 days and every day seems to reaffirm the farmer’s generosity of spirit. Until the last day, when the turkey’s confidence and contentment is at its maximum. The “turkey problem” occurs when “a naïve analysis of stability is derived from the absence of past variations”.

To put it another way, the US property market cannot decline because it hasn?t declined in living memory. As Taleb puts it, as humans we inhabit two systems simultaneously: the linear and the complex.

The linear is predictable and permits the use of mathematical tools of high predictive value.

Complex systems,on the other hand, are marked by an absence of visible causal links between their elements, “masking a high degree of interdependence and extremely low predictability.” They also incorporate non-linear elements often called “tipping points.”

One reason for the severity of the financial crisis, and the losses incurred by banks, is that bankers and financial analysts were using linear tools in a non-linear, highly complex environment otherwise known as the financial markets.The models didn’t work.

The problem we face now as investors will end up being existential for some banking institutions and sovereigns. Our (uncontentious) core thesis is that throughout the west, more debt has been accumulated over the past four decades than can ever be paid back.

The question, effectively to be determined on a case-by-case basis, is whether bondholders are handed outright default (which looks increasingly like the case to come in Greece) or whether the authorities, in their understandable but misguided attempts to keep the show on the road, resort to a policy of inflation that could at some point easily spiral out of control.

As Rothbard wrote, “The longer the inflationary boom continues, the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while [the currency] is worth more than it will be in future.”

“The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”

It may be a new year, but we are beset by the same problems that have been recurring since the crisis began. In most cases, those problems have worsened. One of the few improvements has been in the recapitalisation of Anglo-Saxon banks, but continental European banks seem acutely vulnerable to the potential outcome of a disorderly sovereign default.

Since the problems are the same, so are our preferred solutions: a specific focus on only the most creditworthy sovereign and quasi-sovereign debt (where it offers a positive real return); a specific focus on only the most defensive and internationally diversified equities; genuinely uncorrelated investments; and exposure to objectively the highest quality currencies, namely precious metals.

Euro zone politicians and policy makers have had plenty of time to come to terms with the continent’s problems, and continue to show no willingness to grasp admittedly difficult nettles.

It is symptomatic of the balkanised and adversarial nature of politics in the euro zone (a unified body that exists in theory but barely in fact) that Christian Noyer, chairman of the French central bank, anticipated France’s credit downgrade by suggesting that Britain should be downgraded first.

As the Hildebrand scandal also revealed, most of Europe’s central bankers are not fit to sweep the streets. And still time is running out. Readers of a certain age will recall a late 1980s “big hair” rock anthem called “The Final Countdown.” It was released by essentially a one-hit wonder band.

Its name was Europe.

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duo's picture

nothing ten trillion Euros and an equal amount of FRNs can't fix, right?

Rahm's picture

11:58 tick tick.....

Chief KnocAHoma's picture

But the FED was created to prevent these types of events by invecting and withdrawling liquidity.

Controller on the movie Apollo 13 - "This cann't be right. I'm reading a triple failure."

Badabing's picture

Eliminate jobs, creating high unemployment, so no one asks for a raise.

Short the shit out of everything so as to keep prices in check.

Coordinate all international fiat printing without a reference point.

Fudge all indexes like CPI, GDP, Money supply dept………

Take the blue pill.

ratso's picture

So who is without hubris - you Tim Price, Schumpeter and Rothbard.  Of course, of course you are without hubris you must be the insightful geniuses who reall y understand what is going on.

So now we have it from you - all intervention is fruitless and destructive - thank you for that.

In summary Tim Price is saying THE SKY IS FALLING IN ECONO JARGON!

NotApplicable's picture

You'd look a lot less like an idiot without that gun in your mouth.

FEDbuster's picture

"Although there were a few people that were warning us about this, most economists and investment advisers didn't see this coming." CNBC anchor sometime in 2012

Harlequin001's picture

How many big words can you fit in one pile of bullshit?

Gave up after the intro paragraph...

economics1996's picture

Rothbard should be mandatory reading in every economic class in America.  If you have not done so read Rothbard’s history of banking and depression books.

Belarusian Bull's picture

I couldn't agree more. Rothbard is brilliant.


akak's picture

Europe 1986:  Hair band

Europe 2012:  Hair ball

JPM Hater001's picture

No.  The ESF was designed to fix this.  The Fed only deals directly with US monetary policy.  The ESF is run by the Treasury Secretary.

Thank you ZH for making me smarter every day.

Oracle of Kypseli's picture

I have just revised my thesis of 30% Physical PM's to 70% cash to 50/50.

mick_richfield's picture

Excellent.  You're halfway there.

Doña K's picture

Com'on, give us the other half.....

RobertMugabe's picture

What sane person goes long 100% PM's? Why go long 100 % anything? For a group of people who talk about how they are so much more intelligent than the uneducated masses, aka the "sheeple", there are a lot of people on here who believe they are certain about uncertain events. Hubris is being completely exposed to gold and other PM's without sufficient hedges.

_ConanTheLibertarian_'s picture

When I woke up in 2009 I quickly put half my money in precious metals (66% silver). I've had my doubts but no longer. I'll backup the truck after the market has tanked. GOLD = MONEY

BDI still plunching: Baltic Dry Index (BDI)    -48   926


New World Chaos's picture

Ditto in all respects.  Thanks, ZH!

WmMcK's picture

I only invest a percentage of my available assets in PM's also -- the % I want to keep.

Gully Foyle's picture

I just read where all the nations of the world owe something like 52 trillion dollars.

Who the fuck is this money "owed" to? Aliens?

I just can't comprehend the idea there is some extra-dimensional entity loaning funds to our world.


Teamtc321's picture

The majority to central bank's. Able to print central bank's hit "Ctrl + P" then loan to gubermint's, charge interest and rolled interest, also debt is rolled into central bank backed "bank's", that come with a gun to your head when debt is not repaid. 

The come yelling, Pay us our printed ponzi money bitcheeez or we take your food and water, our  ink purchase account is running low don't you know!!


gmrpeabody's picture

"Who the fuck is this money "owed" to? Aliens?"

Mostly each other.

akak's picture

One gigantic financial circle jerk.

Then why do I, and everyone I know, feel buttraped? (to use a Denningerism)

TheSilverJournal's picture

A ponzi is a scam which pays early investors out of the investments of later investors. In a sense, the world’s monetary system is one giant fiat ponzi scheme with the only question being when will the ponzi end, not if it will end.

The problem is growth is no longer able to keep up with the malinvestments caused by cheap money (0% rates + QE). Either cheaper money is increasingly provided in order to cover up the malinvestment (more QE, or purchasing of MBS, or printing money to purchase anything), or the malinvestments become exposed.

Allowing the malinvestments to become exposed is politically unfeasible, so cheaper money will be provided in order to keep the malinvestments hidden. In a sense, the new investor is the newly created currency..once the new currency stops or even slows, the ponzi fails, but keep the new currency coming in faster and faster and hyperinflation is the end result.

Ms. Erable's picture

Because you, me, him, and the resta those guys over there are being forced to pay debts incurred by people spending like drunken congresscritters.

Gavrikon's picture

Turn around.  Examine that thing sticking in your ass.  Is it a Central Banker's or Politician's dick?  Then you have your answer.

Vendetta's picture

Aliens/bankers ... what's the diff?

Ms. Erable's picture

There's always the possibility that aliens could be benign.

Belarusian Bull's picture

Aliens are not necessary hostile.

New World Chaos's picture

If you listen to David Icke, no difference!

Someday, the NGO will show up saying we can't fix things ourselves and we need their benevolent guidance (plus some technological liquor for the natives).  They would end up owning the whole planet.  There will be others who offer wisdom but nothing else, and if we listen to them, we will be free.  Will we be wise enough to choose the right friends?  Hahahaha

Better hope the hippies show up first.

trebuchet's picture

owed to the banking system: they lend the money to govs and peeps who deposited the money so the banks lent sme more, and so they govs deposited that and borrowed some more and deposited that and the banks lent the new deposits..... 


LTRO just the latest twist on that one. 10 trillion? no problem... its breeding in the alien bank entity belly right now - 

the LTRO depositors arent the ones that borrowed it. 

which means 500bn got lent to banks who lent it to other banks who deposited it with ECB and used that collateral borrow more money to lend to other banks who gonna post that as collateral to borrow more money from the ECB in the next LTRO

The Euro is saved



Gully Foyle's picture


"owed to the banking system"

When did the banking system declare themselves a new country?


trebuchet's picture

they didnt the operate under licence from the govs that host them :)

but they do print money, 10 times more than the central banks, its called credit. 

Gully Foyle's picture


"but they do print money, 10 times more than the central banks, its called credit. "

So they are magicians creating nothing from nothing?

trebuchet's picture


its called the modern (fractional reserve) banking system

you take 10 cash put it into a bank the bank keeps 1 back in case you need some short term cash, lends 9 to somoene else, who deposits it in their bank account and that bank lends 8 to some else, etc .etc ..... 

look at banks loan/capital reserve ratios. 

and central govs print money coz they dont have to back it up with anything like a physical asset such as gold (which they used to do).  and then they release that money into the system by buying gov bonds. or simply change the rules on how much money banks can create by changing their "reserve requirements" that 1 they have to keep back out of every 10. 

lots of people here calling it a ponzi scheme..... 

but thats the system underpinning you giving up your hours of labour and turning those hours into the food and fuel and housing to feed your kids/partner/xbox




sherman roger's picture

The best book for explaining this with specificity, as well as other issues is "Money the greates hoax on earth" Merrill jenkins the man who wrote this was a genius and always strived for absolute accuracy. You can see his writings all over the web by yahooing his name. Highly recommended 5 stars

Kayman's picture

"So they are magicians creating nothing from nothing?"

Uhh... yes.  Fractional Reserve banking is indeed magic. They put in nothing (a line item conjured up on a balance sheet by a central bank or one of its members), and you pay them something called interest.

Both sides of the Fed's balance sheet are liabilities, promises to pay.  Although they call one side "assets".

I can recommend a course in Money and Banking if you would like.

P.S. It requires a "license" to join the Fractional Reserve club, but the club is full for the moment.

Ghordius's picture

+10'000 billions "When did the banking system declare themselves a new country?"

They are multinational corporation (in the case of banks with regional cartels which have the sovereign power of issuing currency).

Every one of them is a country.

And advise governments with their lobbyists, provides them with consultants, aids them with mercenary troops, swaps leaders with them.

Now, if they were national, then they would have some shared interests with you, but their internationality, well, makes them not-really-of-your-country.

GeneMarchbanks's picture

The proper prefix you're looking for is trans, as in transnational. A corporation is 'beyond' borders while their objective is quite universal: profit. The entire idea is a perfectly coordinated way to evade responsibility, like something out of the Kantian theory of radical evil.

EnglishMajor's picture

Yes, and the military-industrial complex is merely one of the bank's most profitable subsidiaries, and as it happens, the most useful since it can be used to enforce the reserve status of a currency with very large, GDP-boosting bombs.

Milestones's picture

About 4000 years ago when a tribe in a desert started, in  unision, a con called lending and interst.

The first axiom of business: Nothing happens until someone sells something.

Our desert folks were the first to figure that out.           Milestones

Motley Fool's picture

Think unfunded liabilities. Promises for social security etc.

malek's picture

Who the fuck is this money "owed" to? Aliens?

In some way and form always to the taxpayers (i.e. citizens) or beneficiaries (retirees etc.) of other countries

Abitdodgie's picture

Rothchild his personal worth is around 500 trillion

Chief KnocAHoma's picture

I'm just not sure I believe that. I still have two gold pieces that he doesn't own...yet.