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Guest Post: The Great American False Dilemma: Austerity vs. Stimulus

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Submitted by Chris Martenson contributing editor, Gregor Macdonald

The Great American False Dilemma: Austerity vs. Stimulus

“Like the issue of...’Is it better to have austerity or stimulus?’ Well, the basic problem there is that we’re not having a quality conversation on the subject.” --Ray Dalio, Bridgewater Associates, on the Charlie Rose program, October 20, 2011

Probably no American city better illustrates the trajectory of post-war US growth than Los Angeles. With its ganglion of highways (built when oil cost $14 dollars a barrel) and its never-ending boulevards that, having replaced vast acreages of citrus, now light up the night sky, the City of Angels spent 40 years blowing past its old pre-war borders and filled up an entire geological basin with infrastructure.

The scale of this expansion can be seen in this very helpful satellite photo from NASA, which captures a sweeping view of Los Angeles County. For example, Hollywood, a common reference point for most Americans, is reduced to a small village from this perspective; a mere data point, if you will, as the greater metro region cascades without interruption 100 miles to the east.

Even more awesome to contemplate is that much of this landscape is duplicated to the south, as well, through Orange and San Diego counties. Indeed, nearly 7% of US population lives in the five large counties of southern California, with counties like San Bernardino having exploded from 200,000 people after WW2 to over 2 million today. Unfortunately, what was long accepted as a triumph of growth the past 60 years has now become a rather burdensome and exceedingly expensive system to maintain.

I bring up the case of Los Angeles because there is currently a rather tribal, oppositional, and, of course, very heated debate taking place in the US right now that roughly frames the solution to our problems as a choice between Austerity and Stimulus. For this debate to have meaning, we need to consider how economic policies will actually solve the problems currently endured in a mega-region like Los Angeles. Unemployment, food stamp use, and energy costs have leapt ever higher here since the 2008 crisis. Moreover, the seeds of these trends were already showing up before the infamous Autumn of 2008. How would either a new phase of belt-tightening or reflationary policy actually affect southern California?

When we witness the clash between the Austerity and Stimulus camps, on the surface there is the appearance that a true debate is taking place between diametrically opposed economists. For example, Austerity folks correctly note that our economy has been badly weighted towards consumption for some decades. They want to clear out the excesses, let the malinvestments fail, and elect an overall path of acute economic pain in order to reset the system. Stimulus advocates find such plans completely unnecessary, if not downright masochistic. Armed with a more humanistic approach, Keynesians want the government to run large deficits to help the private sector deleverage, which of course could take years.

A late 2010 article in the FT by Gavyn Davies illustrates this point. From the viewpoint of sectoral balances, government deficits show up as “savings” on the balance sheet of the private sector. Of course, this is a deduced accounting identity and may not actually tell us much at all about whether the private sector is becoming healthier. I will probe further into this data later on in the essay. But first, the Gavyn Davies chart from the Financial Times: The most important graph of the year:

From the standpoint of a global macro economist, this is my nomination for the most important graph of the year. (See the end of this blog if you wish to suggest alternatives.) It explains why the world’s largest economy, the US, has defied the pessimists by mounting a decent recovery in 2010. It also explains the behavior of the government deficit and shows why it has so far been easy to finance this deficit.

This is the essential argument made by Keynesians and adherents to MMT (Modern Monetary Theory). The US is a monopoly issuer of its own currency, and while inflation is a risk, default (per se) is not. While interest rates are low during deleveraging in the developed markets (DM), why not ease social and economic pain through further borrowing? After all, as the chart implies, the private sector will simply use this spending to repair its own balance sheet. Once a tipping point is reached, then the private sector can start taking on new credit, increasing tax revenues to government, and thus knocking down the debt incurred during the recession (or depression). What’s not to like?

Meanwhile, a great example of the austerity argument comes from Ron Paul, who recently released his plan to dismantle several federal government agencies, end the wars, and consequently chop a full trillion out of the annual budget deficit. Those in favor of such fiscal shock and awe are also persuaded by the view that government spending “crowds out” the private sector, and that government misallocation of capital nearly always exceeds the private sector’s similar mistakes.

Frankly, I am sympathetic to the sincere urges on both sides of this debate. Why not conduct reflationary policy indefinitely, at least as a humanitarian exercise? That is the plea I detected in a recent Martin Wolf column, Time to Think the Unthinkable and Start Printing Again. And also, why not end the wars, kill off a number of regulatory agencies, and promote the growth of small business? Is it not clear that the Project of Empire has greatly deprived the US domestic economy of badly need infrastructure, transport, and educational investments?

Internal to this debate, however, are a number of shared assumptions about the free market’s ability to allocate resources---and the economy’s ability to create supply of those resources---given the proper encouragement from both policy and price signals. Namely, both sides are in near-complete agreement their prescription will not only deliver the US economy back to growth, but also to trend growth--an eventual rejoining, if you will, to the pre-2008 trend.

This is partly why this essay kicks off with a recent quote from Ray Dalio, founder of Bridgewater Associates, who correctly identifies that the situation we face is perhaps much more complex than can be solved by an entrenched, oppositional argument. Dalio is known for describing the economy as a machine that operates according to certain realities. I agree. Moreover, Dalio has also suggested repeatedly that once you understand how the machine operates, you no longer have to be so surprised all the time. Indeed, the last three years have been a true marvel, given how many people refuse to accept we are not in a post-war recession, but rather a debt-deflation depression. Do economists know how the economy actually operates?

As tough as I can be on the economics profession, I actually think most economists understand very well how the economy operates. But here is the problem: Their understanding has been rendered increasingly obsolete by the emerging problem of resource scarcity and the resistance of our built environment to an easy or quick energy transition. In other words, economists typically no longer have a solution for Los Angeles, or for Southern California. Or, for that matter, the United States. 

It’s quite clear that advocates on both sides of the current debate truly believe that the US can return to a growth path. Equally, they share an assumption that the supply of energy will adhere to a shift in the supply curve, which means simply that more supply or substitutes will be brought to market if the price level is sustained at high enough levels.

As the chart above shows, however, neither the steady advance of energy prices into 2008 nor the ensuing three years brought on new, usable energy sources that could reduce energy expenditures for Americans. But there is no mystery as to why Americans, having to spend more for energy and thus less on consumption and investment, have faced persistently high oil prices. We have a built environment that’s designed for liquid fossil fuels. And the expected shift in the supply curve for oil has not occurred.

Earlier this month in the Harvard Business Review, in our response to Dan Yergin’s faith in future oil supply and healthy, industrial economies, There Will Be Oil, But At What Price?, Chris Nelder and I wrote:

Yergin wants to have it both ways: He wants us to believe that the market will bear the high prices required to keep supply increasing against the backdrop of mature fields — which are declining by 5% per year — while at the same time asserting that prices will remain low enough to engender continued economic growth. This, we submit, is impossible.

A rather serious problem in the ability of Developed Economies to coherently allocate resources started showing up well before the 2008 crisis. This status quo, made in part by policy mistakes, credit creation, and the energy limit, still remains today. Crucially, neither stimulus nor austerity will dislodge this status quo. Unless, of course, by austerity we mean to intentionally collapse the system, or if by stimulus we mean to engender a runaway inflation that will eventually yield the same result.

Even if you agree that the US economy has gotten itself into a badly misaligned place, ripping one trillion dollars out of its center is hardly going to “free up” resources or immediately engage the private sector in replacement activity. Equally, throwing more trillions at the economy in its current condition may serve to heighten, not dampen, inequality. As we have seen already, while stimulus may have put a break on systemic collapse, it has likely perfected the status quo. I agree very much with Paul Brodsky’s remarks earlier this month in his essay On Media Coverage of the Protestors:

For those of you who self-identify as progressives, you should re-think your defense of the current system. Money printing is a terribly regressive tax on the working and middle classes. Those with higher incomes and access to credit remain able to maintain their demand for inelastic goods and services, as well as maintain their ability to service debts, while lower wage earners, those with less access to credit, and those losing jobs as the real economy shrinks, are suffering. For those of you who self-identify as “free-market conservatives”, you should also re-think your support of the current system. “Free markets” are compelled to de-leverage presently, not to re-leverage. A more laissez faire regulatory environment and lower taxes do not address the fundamental problem, which is an abundance of credit that re-distributes wealth from the factors of production to the leveragers.


In Part II: How The Coming Decline Will Play Out, I provide fresh data on California's economy and skewer the deductive accounting illusion that government deficits are allowing Americans to reduce their debts. I also show that free market failures are already occurring in the US economy. Austerity programs, from our current juncture, would do nothing but remove portions of the system at a time when the economy is not able to organically produce new economic flows. This would only serve to cripple the economy further, forcing it to contend with our crisis from an even lower starting point.

What the system needs instead is a more targeted transition process, not a radical simplification (Joseph Tainter’s term for collapse). Nevertheless, you can expect the sterile debate to continue, with the newest iteration of stimulus advocates now promoting NGDP (nominal GDP) Targeting. There is no question that capital markets, in the short term, absolutely love stimulus, because it allows existing economic flows to extend themselves temporarily. However, underneath this, all of the poor allocation of existing resources continues apace, and this is the central explanation for why the economy cannot create jobs: The connection between needs and actual production is badly broken.

Click here to access Part II of this report (free executive summary; enrollment required for full access).


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Thu, 10/27/2011 - 12:21 | 1817561 Ruffcut
Ruffcut's picture

Real simple, austerity for main street and stimulus for wall street. Know your place in life, already.

Thu, 10/27/2011 - 12:27 | 1817586 Sheriff Douchen...
Sheriff Douchenik from AZ's picture

Also known simply as QE1, QE2, QE666. etc

Thu, 10/27/2011 - 12:59 | 1817728 redpill
redpill's picture

The talk of "targeted transition" is unfortunately just too arrogant.  Even if you could get such a thing through Congress, which you couldn't without it becoming a bloated nightmare, it assumes that from a centralized standpoint you can properly guide the economy.  It's a fundamentally flawed assumption, and the harder you try the more distortions are made.

The win-win is cutting out portions of the government that are not aiding the private sector anyway.  Cutting need not equal austerity.  Coupled with a clearer, more certain, and lighter tax burden and a friendlier small business environment, it is the only way toward sustainable growth.

I know Martenson is big on the peak oil stuff, but the increase in energy expenditures is not the weight on our backs at this point.  It may be 3-5 years from now, but for the time being it is the dismal labor market and murky business conditions.

Thu, 10/27/2011 - 13:12 | 1817786 Leopold B. Scotch
Leopold B. Scotch's picture

Why constantly dream up ways to recreate (ineffectively) what the market does naturally when allowed to be free of power / intervention collectivized in Big Government?  Each of these dreams creates a whole host of untoward problems which must then be solved, leading to more and more and more and more, etc.

A truly free market ain't perfect (nothing is), but it sure beats the interventionistas being in charge, and will bring more wealth to more people most rapidly vs. any alternative.  We continue to bankrupt ourselves believing interventionistas can fast forward that gaining of wealth.

Thu, 10/27/2011 - 13:39 | 1817853 Dr. Acula
Dr. Acula's picture

>Why constantly dream up ways to recreate (ineffectively) what the market does naturally

Because these enlightened individuals are smarter and more moral and warm-hearted than the greedy, callous entrepeneurs who compete and forecast and calculate and risk their fortunes every day to please their customers.

Most of us grasping cretins must adapt to market conditions, but these humble saviors of humanity are different. They are entitled to execute their well thought-out plans using other people's money and without having to face market disciplines.


Thu, 10/27/2011 - 14:03 | 1818021 dlmaniac
dlmaniac's picture

If people overspend in the past then they'd have to either overproduce or underspend now to make it up. Austerity is simply Darwinism at work and mother nature enforcing common sense.

Stimulus is a foolish Keynesian attempt to mess with the law of nature. But what's your chance of survival when you go against Darwinism? It'd piss mother nature off so bad that she eventually comes in crushing that phony FIAT into zero. Austerity via hyperinflation, BITCHEZ!!!

Bought your physical gold and silver yet?

Thu, 10/27/2011 - 12:53 | 1817697 pemdas
pemdas's picture

This is america.  We don't do austerity.  Before this is over we will make the Greeks look as stoic as North Koreans.

Thu, 10/27/2011 - 13:00 | 1817736 redpill
redpill's picture

We don't need to do austerity.  We have plenty of shit to cut before we'd ever need to be taking a bite out of granny's ss check.


Thu, 10/27/2011 - 13:28 | 1817851 Nigh Eve
Nigh Eve's picture

Sounds like wisdom from the Faux News Network.


Thu, 10/27/2011 - 12:21 | 1817563 LawsofPhysics
LawsofPhysics's picture

"The US is a monopoly issuer of its own currency,"

I stopped right there.  Wrong.  The U.S. pays a private banking cartel to issue it's own currency.  Can't read past that lie, sorry.

Thu, 10/27/2011 - 12:42 | 1817652 CapitalistRock
CapitalistRock's picture

2/3 of US dollar creation happens in private banks through our fractional reserve banking system. The federal reserve does the rest. The US federal government does not manage any money creation.

Thu, 10/27/2011 - 12:52 | 1817690 LawsofPhysics
LawsofPhysics's picture

To the sheep reading this article on zerohedge or elsewhere, the context of the statement in the article gave the impression that as a taxpayer you have some control over whether or not those banks or the fed print or not.  Total bullshit, you do not.  The printing is a fucking shell game that enriches fewer and fewer to the demise of everyone else, period.  So you essentially agree that the fractional reserve banking system is out of control.

Thu, 10/27/2011 - 13:15 | 1817807 Leopold B. Scotch
Leopold B. Scotch's picture

Yep.  And the Congress the People elect is lead around by their wankers by the bankers, the majority of them bedfellows.  Without the Cartel, there is farrrrr lesssss power on the Potomac.

Thu, 10/27/2011 - 13:51 | 1817965 Dr. Acula
Dr. Acula's picture

But I thought the government is supposed to protect us defenseless consumers from evil monopolies and cartels taking our money.

For example, the DoJ is the one service provider to go to when you need help shutting down a monopoly that's competing unfairly with your business.

Now you're telling me the government actually helps form monopolies and cartels?

I'm shocked! SHOCKED!!!


Thu, 10/27/2011 - 13:02 | 1817726 Dr. Acula
Dr. Acula's picture

>The US federal government does not manage any money creation.

US Bureau of engraving & printing:

Federal reserve system:

 "Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the short title of this Act shall be the "Federal Reserve Act.""


Thu, 10/27/2011 - 13:10 | 1817776 LawsofPhysics
LawsofPhysics's picture

Exactly, our grandparents and great grandparents gave up the right to print our own currency a long time ago.  Expect the world to look like pakistan in the not so distant future.

Thu, 10/27/2011 - 13:20 | 1817824 Leopold B. Scotch
Leopold B. Scotch's picture

That, ladies and gentlemen, is called Abdication of power... Although many in Congress gladly voted for it originally and allow it to continue so they may fund Government without having to directly raise taxes at the ballot box.   Inflation (aka classic money printing and credit from thin air) is a, among many things, a tax benefiting both big government and the oligarchy... It is a tax which not one man in a million is able to diagnose.

Thu, 10/27/2011 - 18:41 | 1818944 BigJim
BigJim's picture

I was going to write:

      True. But to be fair, he's talking about the US's ability to avoid outright default via debt monetisation

...when I remembered that all new money is issued as debt. D'oh!

Thu, 10/27/2011 - 12:23 | 1817569 bob_dabolina
bob_dabolina's picture

Anyone looking at 3m libor?

Thu, 10/27/2011 - 13:32 | 1817869 Lower Class Elite
Lower Class Elite's picture

No, but I am looking at 7.62mm FMJ...

Thu, 10/27/2011 - 12:24 | 1817573 mainuh1
mainuh1's picture

We've been warned since the early '70s that population growth versus resources would come to a head early in the 21st century. We ignored the warnings and stood by impotently watching economies collapse. Maybe we should have paid more attention in college instead of getting high.

Thu, 10/27/2011 - 12:27 | 1817585 SheepDog-One
SheepDog-One's picture

Nah, I vote for getting high. Doubles for me please.

Thu, 10/27/2011 - 12:38 | 1817630 Little John
Little John's picture

me too

Thu, 10/27/2011 - 13:25 | 1817830 Leopold B. Scotch
Leopold B. Scotch's picture

The dip-wads among my college professors generally provided me with nothing but useless "in the box" material, turning out brainwashed automatons.  In hindsight I should have smoked a whole hell of a lot more.

What I learned about the shit going down the last decade I taught myself through my own efforts, and with the contribution of sites like this.

Thu, 10/27/2011 - 12:42 | 1817653 JR
JR's picture


What high school or college teacher would have told us that the coming open borders concept would over shadow all of the population control adherence and magnify U.S. unemployment, prison and crime expenses, education costs,  welfare and subsidized and subprime housing?

Los Angeles County, California: Population 9,818,605. California population, 37,253,956.

Persons of Hispanic or Latino origin in Los Angeles County, 2010: 47.7%

White persons in Los Angeles County not Hispanic: 27.8%.

Foreign born persons Los Angeles County 2005-2009: 35.4%.

Language other than English spoken at home in Los Angeles County, pct age 5+, 2005-2009: 56.1%. In California: 42.2%.

Information from U.S. Census Bureau.


Thu, 10/27/2011 - 13:56 | 1817998 moneymutt
moneymutt's picture

our cities, our factories, our houses are designed for cheap energy, transitioning will be expensive, but we can live a decent life-style consuming far far less energy and far less difficult to grow, water intensive food, livestock, so even if new, cheaper alternatives are not found, while something like meat might be expensive and Cali may not be able to afford to grow rice in a desert, we could still do quite well. Most of our problems will be solvable, but likely will not be solved well because short sightedness of our politics and our markets

Thu, 10/27/2011 - 14:45 | 1818170 blunderdog
blunderdog's picture

Energy-wise, cities tend to be significantly more efficient than suburban/rural population distributions, but come on.  You really think you're going to get 150,000,000 people who hate each other to move to the same neighborhoods?


Thu, 10/27/2011 - 12:25 | 1817576 TheSilverJournal
TheSilverJournal's picture

The clearing of the malinvestments is imminent. Either QE is stopped, exposing the malinvestments and depositors are allowed to lose their money, leaving physical cash to maintain some value, or QE is continually increased, keeping the malinvestments from becoming exposed, until hyperinflation hits. Hyperinflation is completely economically devastating and Americans will become much poorer. With hyperinflation, the US will no longer be able to benefit from the printing press and will no longer be able to support housing through cheap credit. All in all, housing will crash 70%-80%. On the other hand, gold will hit min. $10,000 in real terms and the silver to gold ratio will hit min. 10 to 1, meaning silver will hit $1,000 which is a near 3,000% gain..SO..Sell your house and buy silver before everyone else does.

Thu, 10/27/2011 - 12:36 | 1817621 Ruffcut
Ruffcut's picture

If I sell my house, where do I store my silver?  I can't live in silver, nor eat it. I took a bite and broke a tooth.

Thu, 10/27/2011 - 12:41 | 1817647 TheSilverJournal
TheSilverJournal's picture

Rent. It's cheaper than a mortgage, you don't own a depreciating asset, and you don't have to be bothered with maintanance / repairs. Buy silver with what you save.

Thu, 10/27/2011 - 13:30 | 1817862 Cruel Aid
Cruel Aid's picture

You lose homeowner rights though.

As in, Someone else has a key and the right to enter.

Thu, 10/27/2011 - 14:56 | 1818217 TheSilverJournal
TheSilverJournal's picture

Absolutely. And you also can't paint whatever color you want. If you have the luxury to spend the money on those things, then by all means, spend on. But don't confuse real estate as an's not. Real estate is consumption. It's like owning a boat, but worse, because a house is immobile.

Thu, 10/27/2011 - 12:56 | 1817716 GeezerGeek
GeezerGeek's picture

I took a bite of my son's iPhone and broke my dentures. You can bury you silver in my back yard, next to mine. For a small monthly fee, of course.

Thu, 10/27/2011 - 18:44 | 1818952 BigJim
BigJim's picture

I took a bite of some FRNs and caught halitosis.

Thu, 10/27/2011 - 19:16 | 1819070 StychoKiller
StychoKiller's picture

Given the amount of miniature livestock on an FRN, consider yourself lucky! :>D

Thu, 10/27/2011 - 20:26 | 1819278 BigJim
BigJim's picture

I took some anti-FRNs (silver in colloidal form) and it went away :-)

Thu, 10/27/2011 - 12:38 | 1817577 Mercury
Mercury's picture

Of course, austerity always seems to be heavily weighted toward the private and not the public sector.  When push comes to shove it's always the firemen and the teachers that are hanging by a thread because *trust us* all other possible fat has already been cut from the public fisc.

Deflation doesn't have to be all that bad for average individuals.  Certainly not as bad as we're constantly told it is.  It's not so hot if you're in the government growing business though.


Thu, 10/27/2011 - 12:42 | 1817654 Pants McPants
Pants McPants's picture

That's exactly right.  Police, teachers, and fireman are ALWAYS dangled in front of the sheep to justify more spending.  The fat cat administrators behind the scenes, though?  They're the made men and women who get to sleep in the beds......with sheets.


Thu, 10/27/2011 - 13:07 | 1817762 Cpl Hicks
Cpl Hicks's picture

Sleeping in bed with sheets!

Now you're just mocking all of those brave OWSers out there in their sleeping bags!

That's just plain mean and insensitive, as Barry O would say.

Thu, 10/27/2011 - 18:46 | 1818957 BigJim
BigJim's picture

It's MISTER Barry O, to you, boy.

Thu, 10/27/2011 - 12:49 | 1817677 redpill
redpill's picture

Deflation is great for savers.

Thu, 10/27/2011 - 12:53 | 1817698 Dr. Acula
Dr. Acula's picture

>Deflation doesn't have to be all that bad for average individuals.

Why are you assuming that austerity causes deflation?

i.e. why do you think reduced government spending would cause the money supply to shrink?


Thu, 10/27/2011 - 13:49 | 1817966 Mercury
Mercury's picture

Private sector austerity (individuals spending less money on stuff) certainly won't drive prices up.

Reduced government spending would detract from the velocity of money and greater velocity is inflationary.

Thu, 10/27/2011 - 19:17 | 1819073 StychoKiller
StychoKiller's picture

Bring it on!

Thu, 10/27/2011 - 12:26 | 1817580 SheepDog-One
SheepDog-One's picture

Go ahead, start cutting the subsidy checks almost 50% of americans survive on. Sure, 'green' markets are pretty....someones going to have to start paying for it though.

Thu, 10/27/2011 - 12:30 | 1817600 Archimedes
Archimedes's picture

There will be no Austerity. Since everyone is quoting Ray I will too. Ray basically said that fractional Reserve banking system only survives when credit expands. Once deflation (Austerity happens) the entire system implodes. He laid it out clear as crystal. This is why the US and Europe will print, kick can or do whatever they can to keep the ponzi going until it totally collapses on itself.

Today, the Ponzi continues....

Thu, 10/27/2011 - 12:39 | 1817616 SheepDog-One
SheepDog-One's picture

Or maybe you have it all wrong and 'perpetuating the Ponzi' is not the game at all, and instead one day soon we see nukes going off in US cities or something along those lines. No one saw 9-11 coming on 9-10.

Thu, 10/27/2011 - 12:40 | 1817636 Ruffcut
Ruffcut's picture

Maybe that is what PPT really stands for. Ponzi Perpetuating Team.

The prop desks are in tandum. The fed said, pump or jump, bitchezzz.

Thu, 10/27/2011 - 12:53 | 1817695 redpill
redpill's picture

Not all "austerity" is equal.  Ron Paul's proposal doesn't touch social security, instead it goes after federal departments that are largely useless.  So I would argue with Mr. Martenson that he's painting with too broad of a brush.  Cutting government spending does not necessarily mean austerity in the way that Greek pensioners are being impacted in that country.  

Further, bringing troops home from around the world would actually help domestic demand.

This has happened before, following WW2.  The Keynesians were terrified that with massive cutbacks in government spending that the US economy would crash.  Instead it flourished. 

Thu, 10/27/2011 - 18:49 | 1818975 BigJim
BigJim's picture

Nukes and their fallout would kill TPTB too.... so I can't see that happening to any extent (at least in the West).

Thu, 10/27/2011 - 12:37 | 1817619 Mercury
Mercury's picture

I don't think you need expansion beyond a certain point.  as long as the net interest margin is sufficient (the old 3-6-3 rule) things can hum along quite nicely with credit stasis.

With ZIRP and too much debt overhang however...not so much.

Thu, 10/27/2011 - 12:40 | 1817638 Archimedes
Archimedes's picture

Totally disagree. What do you think The US Government is doing running 1.3 Trillion in deficits? They are taking up the credit slack for the consumers. Have the US stop deficit spending and the economy pancakes! Debt and credit are the same thing. The Government is borrowing from the future. Which is credit.

Thu, 10/27/2011 - 14:12 | 1818042 Mercury
Mercury's picture

Fractional reserve banking (at the community bank level anyway) and (government) deficit spending are two different things.  We've had the former without the later before.  The government has now painted itself into a corner policy-wise plus they are increasingly in business for themselves at this point anyway.  So, they'll run up huge deficits and worse to keep the leviathan alive.

Thu, 10/27/2011 - 12:26 | 1817581 Archimedes
Archimedes's picture

I have realized that there are lots of Perma Bears and lots of Perma bulls, but very few people who take the market for what it is and trade without either bias.

Thu, 10/27/2011 - 12:29 | 1817599 SheepDog-One
SheepDog-One's picture

Sounds nice and reasonable after the fact, but 2 days ago even the bulls were saying we're on very thin ice here. So Europe pulls an imaginary rabbit out of the hat, markets marvel at its splendor and rise 4%, and today everyone says 'Well, shoulda been rational traders and went long'. All well and good for rear view 'traders'. So anyway, whats your next week trades look like?

Thu, 10/27/2011 - 12:35 | 1817615 Archimedes
Archimedes's picture

I hear ya Sheep. I could have gone long yesterday just as easily as I coulda went short. So today I am looking at stocks and ETF's up 7, 10 event 15% saying I could been a contender. But I could have just as easily been wrong and down 15%. That is why I am not in the market. Because it is not being driven by funtamentals. It is being driven by government policy.

And I wa not referring to this day in particular. I was refering to Chris and other pundits as a whole. A man who is always a bear. Just like people like Cramer are always a bull.

Thu, 10/27/2011 - 12:40 | 1817622 SheepDog-One
SheepDog-One's picture

Well at some point here the bears gotta be right in a big way. We just dont know when. 

I dont believe that theyll just keep kicking the can until it blows up in their faces, theyve got to have some other big 'game changer' planned ahead.

Thu, 10/27/2011 - 12:56 | 1817719 Ruffcut
Ruffcut's picture

The fact is that crowded bear trades, often get beat up bad. We seen it time and time again. Shorting is like putting a bullseye on your forehead.

You can hedge with call options, etc, but will always be paying for protection where they still collect money from you.

THose woho have cash and bought enuff PM, items of sustainability and a simpler life are the better off.

Trading on most days is like chasing your own tail. that's why alot here are blog addicted. Just bullshitiing and less trading seems less stressful.

The casino, has some debt issues. They are calling all their patrons to the  table.  "let's play a few more hands". Me say, all bets are off telling them go play with themselves, in the corner of the oval office.

Thu, 10/27/2011 - 13:06 | 1817755 topcallingtroll
topcallingtroll's picture

Hey sheep

I tried to get u into EWZ.

hehe. Ssome of us get a few trades right.

Ya should have shorted silver with me too.

Aahh...the glory days.

Thu, 10/27/2011 - 12:26 | 1817582 JR
JR's picture

As Nathan Marin put it today, the U.S. trumped up QE3 GDP “rose to perfectly meet the 2.5% ‘growth’ expectations. Again, this is a completely bogus measurement with inflation way understated which overstates growth.  Also, they count the creation of debt, including our government’s deficit spending as ‘productivity.’"

Nathan Martin has one of the broadest and most comprehensive understandings of finance and debt in the world today and he’s willing and brave enough to publish it. In today’s political climate, he’s the opposite of the paid economists supporting the Establishment to cover up its corruption and lies regarding the equity markets and, especially, its manipulated government indices – all manipulated by those who manipulate the currency.

Says Nate: “GDP is not a measurement of ‘production,’ it is a measurement of money and moneyness. And the comparisons of debt to GDP are completely fallacious! What matters is not a nation’s debt to the nation’s trumped up ‘productivity,’ what does matter is the nation’s debt compared to the nation’s income.  Comparing the nation’s debt to GDP is like comparing your own debt to your neighbor’s productivity – why do they have to do with anything? Nothing! It’s completely ridiculous. What matters in regards to YOUR debt is YOUR income – period.”

Thu, 10/27/2011 - 12:43 | 1817657 tsx500
tsx500's picture

right on, i get Nathan's daily email rant, he is a ' don't miss ' .    

Thu, 10/27/2011 - 12:33 | 1817611 Pants McPants
Pants McPants's picture

What this "system" needs, and I assume the author means the .gov/banker construct, is collapse.  Fascism, to any degree, is always and everywhere a bad thing.

Thu, 10/27/2011 - 12:38 | 1817631 SheepDog-One
SheepDog-One's picture

What we need is just 1 adult somewhere in a position of power to throw in the monkey wrench.

Thu, 10/27/2011 - 12:59 | 1817732 GeezerGeek
GeezerGeek's picture

I volunteer to be dictator just long enough to throw that wrench. There's no one else I would trust to be dictator, and I must be an adult because my package of diapers says they are for adults.

Thu, 10/27/2011 - 12:33 | 1817612 Mediocritas
Mediocritas's picture

Sounds like Chris Martenson has discovered Cullen Roche.

Thu, 10/27/2011 - 12:37 | 1817623 Little John
Little John's picture

I liked that definition of collapse - “radical simplification”.

Thu, 10/27/2011 - 12:40 | 1817640 Dr. Acula
Dr. Acula's picture

"emerging problem of resource scarcity"

That's absurd and retarded. Scarcity is eternal and ubiquitous. It's an inescapable fact of the human condition.

"economists typically no longer have a solution for Los Angeles, or for Southern California. Or, for that matter, the United States."

What are you tring to solve exactly???

If you want more problems, economics shows that a central planner engineering a "solution" is a great way to cause them. Here's one example:

"Ludwig von Mises argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[1] This led him to declare "...that rational economic activity is impossible in a socialist commonwealth."[1] " -

Why not try learning some economics before condemning it?


Thu, 10/27/2011 - 15:34 | 1818379 Cugel
Cugel's picture

Even more remarkable is that the author who has just discovered scarcity considers it more "humane" to drain off further scarce resources keeping wealth-destroying enterprises afloat. 

I think you can add "absurd and retarded" to the list of inescapable facts of the human condition.

Thu, 10/27/2011 - 12:41 | 1817648 PulauHantu29
PulauHantu29's picture

Come on...recession is over...I heard it on TV today.

Thu, 10/27/2011 - 12:42 | 1817650 Eally Ucked
Eally Ucked's picture

You don't need any austerity programs, you will get it through your pensions funds. They are down and will never recover, but sheeple won't notice it. Next step will be cuts in all promised and contracted benefits programs. Of course all those "true capitalist" will approve it, who the fuck cares about contracts now a days. You signed the contract 20 or 30 years ago for your skills and work, but it is void now because they spent too much for bonuses and moving your industry to China.

Thu, 10/27/2011 - 12:42 | 1817651 LongSoupLine
LongSoupLine's picture

blah, blah, blah...more "common sense" words and charts that do NOTHING to ward off the  greedy and power driven elite whom are making all the self-serving decisions that continue to bury the majority.

Do you know how many times I've written my "representatives" with cut-n-paste "facts" from ZH and my own thoughts and ideas?!?!  The best I've gotten in return is a Dear John form letter.

I'm fucking fed-up with it all...we in the trenches ARE ON OUR OWN!

Thu, 10/27/2011 - 12:44 | 1817659 Archimedes
Archimedes's picture

Off topic but: god does DRV look attractive at 8.75! Pull the trigger you pussy!

Thu, 10/27/2011 - 12:50 | 1817681 LookingWithAmazement
LookingWithAmazement's picture

The US economy is growing, no recession or collapse. All the doomprophets and their websites can go off the table. Boring world we live in.

Thu, 10/27/2011 - 12:57 | 1817720 LawsofPhysics
LawsofPhysics's picture

Indeed, and since the booming economy is going to need resources to keep booming, I think you know where to put your money.

Thu, 10/27/2011 - 13:00 | 1817735 SheepDog-One
SheepDog-One's picture

'Economy is growing', no thats fake money printing youre seeing, along with total BS 'GDP' prints.

Thu, 10/27/2011 - 13:07 | 1817759 Dr. Acula
Dr. Acula's picture

>The US economy is growing, no recession or collapse.

True. Just like nominal wages have grown in the last 40 years.

I can also make my organ grow, if I redefine the "inch" to be a millimeter.


Thu, 10/27/2011 - 13:16 | 1817811 Vergeltung
Vergeltung's picture

my, my, are you dumb.


Thu, 10/27/2011 - 12:52 | 1817691 GeezerGeek
GeezerGeek's picture

The author says "the ability of Developed Economies to coherently allocate resources" is a problem. By coherently does he imply a cluster of policy wonks getting together in a circle to come up with a plan to allocate resources? I prefer the invisible hand in Smith's Wealth of Nations. I don't like some elitist group telling me what kind of targeted transision process we need.

We do need to transition to a constitutionally limited central government. If government shrinks and stops interfering with the natural course of economic events then TBTF entities will indeed go the way of the dinosaur, as they should. If energy is a problem, let's allow the free market to determine if 'drill, baby, drill' will solve the problem, not some anti-growth ecology-minded bureaucrat. Economically speaking, government is a friction-generating element acting as a brake on the economic engine.

Facetiously: the author states that nearly 7% of the U.S. population lives in the five large counties of southern California. Does anyone have any information about the percentage of the Mexican population living there?

Thu, 10/27/2011 - 13:17 | 1817813 JR
JR's picture

Thanks for the question: I’m looking for the answer.  In the meantime:  2010 U.S. Census results show that “the changes in California and San Diego County closely mirrored those of the nation.” Here are random 2010 U.S. Census statements:

San Diego is home to the 10th-largest Hispanic population, among the most populous counties nationwide. It also had the ninth-highest percentage of Hispanics in the country, among the most populous counties.

1st -- California’s ranking in the number of Hispanic residents. It is tied for second among all states in the percentage of Hispanics in the total population.

46.5%  -- The percentage of Hispanics in the United States  is 50.5 million Hispanics; 46.5% of them in 2010 lived in California or Texas. Those two states were home to half of the Hispanic population in 2000.

Diversity across the U.S. is on the rise.

The greatest increase occurred in the Hispanic population, which accounted for more than half of the country’s population growth in the past decade.

More than 9 million Americans checked multiple race categories on their 2010 census form, up 32 percent from 2000.

“This really is a transformational decade for the nation,” said William H. Frey, a demographer at the Brookings Institution in Washington, D.C. “The 2010 census shows vividly how these new minorities are both leading growth in the nation’s most dynamic regions and stemming decline in others.”

Nationally, Hispanics and Asians were the two fastest-growing demographic groups; both populations soared by about 43 percent from 2000. Hispanics accounted for one in six Americans last year; among those under 18, Hispanics were roughly one in four.

Births and domestic migration drove the Hispanic increase, demographers said. 

Thu, 10/27/2011 - 12:54 | 1817705 razorthin
razorthin's picture

2.5% gdp? 0% chance.  Many suckers taken in today.

Thu, 10/27/2011 - 12:56 | 1817715 csmith
csmith's picture

Simplest and most meaningful relationship in the U.S. economy today:

Diesel: $3.99/gallon

CNG (equivalent energy value) $2.39/gallon


Even with ZERO subsidy, the economics are compelling. The payback is less than 15 months for fleet operators of even moderate size. It will happen.






Thu, 10/27/2011 - 20:23 | 1819271 malek
malek's picture

Unfortunately, there are not many CNG models available any more...

Thu, 10/27/2011 - 12:59 | 1817729 El Viejo
El Viejo's picture

"The connection between needs and actual production is badly broken." 

It started in the early 80's. CEOs looked and found a way around regulation and taxation. Reagan supported this effort with the Self Employment tax. Cheap labor was sought and found in China. All to support Wall St. and stockholders. A quick profit. All the while the private sector was forced into debt and boomer-demographic-less-spending all combined to form the perfect storm of: over production, high personal debt just to maintain status quo, high energy costs, governmental high salaries and benefits and reduced boomer spending as they approach retirement. And to whom does the stimulus go? Why the ones who do not need it. And low rates to further entice more into debt. Amazing! Like it or not Obama was right when he said we will all have to contribute. The Feds have frozen federal salaries for three years. But just try and refi your house. Oh no your not taking from our pension pot. And just try and reduce benies to state government leeches. Oh no your not reducing our salaries or benies. And just try and increase taxes for the rich who do not buy that much anyway and instead put unecessary money into the already overstuffed markets.

Bring production and consumption back into balance or prepare for this to be with us all for a long time.

Thu, 10/27/2011 - 13:03 | 1817744 NEOSERF
NEOSERF's picture

Lot of big words in here but overall I agree.  The structural misallocation of funds by the government (I say mis even though so much of the daily spend is not voluntary) to entitlement programs, maintentance, wars that have not tangibly raised productivity is probably not fixable at this point.  Too many factions to cut anywhere and try to re-allocate say $200b/yr from Medicare towards energy R&D or college education reform.  At this point an increasing % of taxpayer money will end up going to keep grandma warm or to repave a stretch of I-95 which provides no real increase in value to us as a nation.  Velocity of money is not a subsitute for investment in key growth areas. 

Thu, 10/27/2011 - 13:46 | 1817931 sbenard
sbenard's picture

Interesting set-up, but this really is just an elaborate sales spiel! Once you click through to Mr. Martenson's website, you must first acquire a "free" username and password to the website. But if you really want the "answers" he proposes, you must PURCHASE a subscription. I don't mind the need to purchase, but it's a bit disingenuous to masquerade a sales letter as an article on ZH, when its nothing but a teaser to buy a product. This isn't an article; it's an ADVERTISEMENT!

Thu, 10/27/2011 - 14:11 | 1818043 daxtonbrown
daxtonbrown's picture

[What the system needs instead is a more targeted transition process, ]

You wouldn't need a transition process if you let a free market eliminate the weak before they got too big to fail. Now you are just putting band aid on band aid on a gangrenous gaping hole.

Good luck with that.

Thu, 10/27/2011 - 14:58 | 1818203 antonwarnung
antonwarnung's picture

The Fed is a complete  joke.  They are so worried about deflation they don't realize they are killing the consumer which will eventually kill whomever is left that they think they are trying to protect.  The reason confidence is down but spending is up is that at some point with the prices of energy we have had and the inflation being shoved down our throats we have to buy things.  Look cars wear out shoes wear out.  The mood is sour and Americans don't feel they have a choice sometimes.  Well they do.  Fix the old car, polish the shoes, boycott all the big corporate stores.  If there is anyone left in your world selling local products buy them.  Give all your old clothes to friends who can use them.  Grow tomatoes in you front yard and give some to your neighbors.  This will be the new reality when this joke a stock market led prosperity evaporates.  It will evaporate because it isn't real.  Make money from it if you can while you can but don't be fooled into thinking it can last and left to holding the bag.  In the mean time take your frustration out by meeting real people and having real experiences.


Thu, 10/27/2011 - 14:55 | 1818204 antonwarnung
antonwarnung's picture

well what are you waiting for?

Thu, 10/27/2011 - 15:34 | 1818377 Gamma735
Gamma735's picture

Hell, in Texas, we are drilling more than 5,000 new oil wells in 2011!

Thu, 10/27/2011 - 16:19 | 1818555 antonwarnung
antonwarnung's picture

Good we need to be.  This will probably be enough to keep production flat even at these prices far above historical averages.  Peak oil believers will be the first to tell you that the earth will never run out of oil.  Most of the easy and cheap oil is no more though.


Thu, 10/27/2011 - 20:22 | 1819268 malek
malek's picture

Yergin wants to have it both ways: He wants us to believe that the market will bear the high prices required to keep supply increasing against the backdrop of mature fields — which are declining by 5% per year — while at the same time asserting that prices will remain low enough to engender continued economic growth. This, we submit, is impossible.

The statement is completely useless without a time frame! 

When will oil prices start seriously inhibiting economic growth, within the next 5 years, or a decade or quarter century??
Do you believe such an estimate to be static, i.e. very unlikely to be pushed out by any kind of adaptation?

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