Guest Post: Money from Nothing - A Primer on Fake Wealth Creation and its Implications (Part 2)

Tyler Durden's picture

Submitted by Zeus Yiamouyiannis from Of Two Minds

Money from Nothing - A Primer on Fake Wealth Creation and its Implications (Part 2)

Only in a debt-based money system could debt be curiously cast as an asset. We’ve made “extend and pretend” a quaint phrase for a burgeoning market for financial lying and profiteering aimed toward preventing the collapse of a debt- (or lack-) based system that was already doomed by its initial design to collapse. This primer will detail the major components and basic evolution of fake wealth creation, accelerating debt expansion, hollowing out of the economy, and inevitable financial implosion.


The implications for this exponentially increasing dominance of fake wealth have only gotten more comprehensive and absurd since I last summarized them in an article two years ago. ( Unhinged: When Concrete Reality No Longer Matters to the Market (and What to Do About It).

Apparently you only need a few things to make a mockery of the entire global economic system, and big banks garnered these few important things through “regulatory capture”:

1) Unregulated, unenforced rules (particularly for derivatives)
2) license to “mark to model” (assign your own values to your assets)
3) ability to peg present value to irrational expected future returns (based on unlimited, exponential growth)
4) infinite leverage (no effective requirements for reserve capital in unregulated “shadow” markets)
5) massive size, so that the bank or company is "too big to fail"
6) non-transparency and non-accountability.

So here we have a system where you can 1) make up your own rules, 2) establish any value for any asset you choose, 3) inflate that value a hundred fold based on ostensible future value and returns, 4) leverage that inflated value another thousand or a million fold simply on your say-so, enough to buy up multi-billion dollar firms if you choose, 5) lean on taxpayer bailouts when you get into trouble, and 6) do this without any disclosure or accountability, all based upon a self-interested formula you concoct to enrich yourself.

To this we can now add:

7) effective take-over of national governance by private financial interests, meaning zero prosecution for large-scale control fraud, continuing complicity with and backdoor subsidies to big banks, and the stripping of national assets to pay for illegitimate debts.

8) making uncertain the very notion of private property by promoting illegal and nonsensical assignment and title processes in the mortgage market.

9) shameless annihilation of pensions and investor funds by simply leveraging those funds out of existence and charging enormous fees to do so.

How do we know this is going on? By looking at what is allowed to go on already, evaluating its profit potential, and multiplying those “market possibilities” by all the major players. If it can be done, and it maximizes profits (no matter how crazy from a systemic view), it will be done. The market for fraud is the most booming and has the highest profit potential. It pays far greater returns than any other market including precious metals.

Major players (Goldman Sachs, et. al) have the means, the motive, and the opportunity to expand the fraud market. In terms of brute gain they have been rewarded greatly (with no apparent downside) in cheating, hiding, conning, and now simply stealing.

What do you expect they will do going forward? There is no moral hazard as far as they are concerned. It’s all good for them. Therefore, they will exercise no restraint. They will accept no self-imposed limit to their asymmetric destruction of broader functioning capitalism because greater destruction maximizes private profit. If anything they will accelerate their demolition to get the greatest competitive share of what’s left.

Look at MERS (Mortgage Electronic Registration System) and MF Global. They provide the clearest evidence of how the peddlers of phantom wealth will continue to push their anarchy toward social and economic breaking points. No action is too outrageous any more.

MERS: “Sure we helped ‘get around’ fees and recording requirements and seem to have ‘lost track’ of who owns what in terms of real estate properties, but don’t blame us we are just a facilitator, a clearinghouse, an agent of transactions aimed at creating greater ‘flexibility’ in the mortgage market. Fraudclosure and those millions of forged documents that tried to retroactively record and assign titles, deeds, and transfers? Well, that is not our concern or our fault, though it is regrettable that nobody seems to know who owns what.”

MERS provided an avenue for investment banks to slice and dice mortgages into “mortgage backed securities” (MBS). When you combine this capability with the advent of essentially unlimited leverage and rehypothecation, it is highly likely that the same real estate collateral has been pledged to a multitude of different investment portfolios.

In not so many words, the same house has been sold to many different buyers. Since there is no way to trace true ownership through the shroud of “complexity” enabled by MERS, railroaded foreclosure proceedings, and exotic securities, sweetheart deals get cut between banks and the government that, yet again, amount to a slap on the wrist, enablement of violence against property rights, and kicking of the can down the road.

When will the madness stop? When someone finally has to pay. Your guess is as good as mine on this, since the technologies of avoidance have become so creative and interlinked. I’ve predicted some major movement in September/October of 2012 ( The Big Squeeze, Part 2: Abused Fundamentals and Fake Markets: How They Play Out) but we will have to see.

MF Global: “We don’t know where 1.6 billion dollars of segregated accounts went.” Poof, gone. And yet no prosecution, no investigation? What if your personal bank said that? What if your pension said that?

Yet, don’t be surprised if you do hear this same “bewilderment” from Bank of America and CALPERS (California Public Employees’ Retirement System). In order to meet increasing obligations pensions have moved to invest in the unbacked promises of toxic derivatives, so-called “high return” junk vehicles that were rated “AAA” by Moody’s and Standard and Poor’s.

As we speak California’s public pension is insolvent, bankrupt. I guarantee it. In a classic Ponzi scheme it’s current obligations are being met with contributions, and the so-called investments that have been made to fund future obligations will be exposed as empty shells when push comes to shove. The money will be “unavailable.”

But don’t worry, I’m sure the federal government will try to rescue California with “debt restructuring” or printed fiat currency. If the government can bail out banks to the tune of 700 billion dollars up front (and many trillions through the back door) why not throw a 250 billion dollar federal bailout to the world’s tenth largest economy and one with the nation’s most electoral votes?

Since unregulated shadow investment banking has been collapsed with regulated investment there are no guarantees that market values will be realized or that promised monies will materialize when needed. Almost every unregulated investment scheme seems to be following the same Bernie Madoff model: A greater number of current contributors attracted by great (falsified) “returns on investments” are paying into an investment fund. Part of that contributor money is funneled to those currently liquidating their positions or requiring dividends.

The other parts go to fund financialized “churn”: profit-taking by the managing company and fees (transaction, maintenance, representation, and processing fees, etc). The managing company then simply substitutes promissory notes for the incoming cash as money-equivalent “value” in their reports and in your accounts. These promissory notes if inspected are likely based in nothing, backed by nothing, and answerable to nothing. But since unregulated markets are non-transparent we won’t be able to absolutely confirm their illusory value until those markets blow up in our faces.

We can look at patterns, though, and get a pretty good approximation of the scale of the theft. We can ask, “Where is the money coming from?” After the 2008 financial crash, Wall Street and its zombie banks were rewarding themselves with a near-record 144 billion dollars of compensation. If the money is not coming from them (since they just crashed), where is it coming from? It’s almost certainly coming from us, and not just from taxpayer bailouts, but pensions, deposits, real estate, and any other hard asset or currency that can be scavenged and replaced with mere numbers.

What are more general implications of fraud building upon fraud?

Ever-expanding debt: Lending money into circulation at interest in order to pay debt, creates more and more debt. The economy is forced to expand just to meet debt payments. Since there are limits to growth to real and productive economies, then unreal, parasitic, or shadow economies will grow to fill the void between skyrocketing debt obligations and normal production.

Unfunded social insurance, pension, and entitlement obligations: Population increases, coupled with a baby boomer population bubble, ballooning administrative bureaucracies, and governmental raiding of trusts (like social security) have catapulted costs and have stressed the medium- to long-term capacity of social insurances, pensions, and entitlements past the breaking point even as delivery of services and funds are maintained for the short term.

Austerity measures will be coming sooner than we think to cover future obligations: limited benefits, increased contributions, and delayed retirement, but they will still be a better deal than junk “AAA” derivatives that disappear once money has to be paid out.

Destabilized economies: The Fed’s current policy of interest-free money to banks appears to encourage excessive private risk-taking, which is converted into public liability in the form of bailouts, thus further destabilizing the economy and increasing national debt.


How can this widening gap between multiplied debt and productivity-backed money be reconciled? The short answer is, “It cannot.” It is an inherently unsustainable system, where debt will eventually eclipse the entire value of all world resources, assets, and productive effort unless debt is simply forgiven at some point. (See my arguments for doing just that in Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy, with over 24,000 reads on Zero Hedge when reposted from Of Two Minds original post of Endgame).

We can also see we must come to terms with the unjust and completely unsustainable nature of debt-based money.

If fraud is something from nothing, then solutions to fraud involve re-establishing exchange systems based upon something from something. These systems are already being developed with local currency experiments, bartering, and a host of other emerging alternate economic models and practices (see Part 5 of Unleashing the Future: Advancing Prosperity Through Debt Forgiveness with links to the five-part series). These options need to be expanded and further developed.

Our task is to identify fraud in all its forms, stop our participation in them, pursue a counteroffensive and commit to moving our money, time, and value to genuine, prosperous, health-affirming, financial commitments and practices. We can see increasingly that we have nothing to lose and much to gain not only in terms of financial stability but personal and community fulfillment.

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slewie the pi-rat's picture

the bernieMadoffInvestmentPlan


Mark Carney's picture

ITs all good, Snaapl is nearing $600, any minute now.  POP!

trav7777's picture

CRAAPL has, repeat $100B cash.

As for debt, it IS someone's asset, the lender's.

Belarusian Bull's picture

It's an asset only if paid back.

You can count it as asset, but in fact, untill redeemed, it is not.


Hopeless for Change's picture

Unless the debtor declares bankruptcy, but that hardly ever happens.

tonyw's picture

priceless.. for everything else use a CREDIT card.


priceless.. for everything else use a DEBT card. there fixed it:-)


trav7777's picture

I have the most euphemistic card out there, the Chase "Freedom" card. 

StychoKiller's picture

"Money, so they say:

Is the root of all evil today!

But if you ask for a rise, it's no surprise --

They're giving none away, away, away" -- Pink Floyd

Abiotic Oil's picture

If there wasn't a problem with creating money out of thin air we would all have a printing press in our homes.

VanceEva1's picture

my classmate's sister makes $82 hourly on the internet. She has been out of work for 10 months but last month her income was $17192 just working on the internet for a few hours. Read more on this site ....

Pseudo Anonym's picture

you're an asshole and spamer

GottaBKiddn's picture


Everything appears to be moving ahead as planned.

fourchan's picture

enslave a free people with debt, aquire all assets and production through boom bust cycles.


100 years to destroy america,,the fed.

sunaJ's picture

     It is a tough job keeping it all together, though.  Bravo, dear leaders, and never give up!

eddiebe's picture

Excellent!  Thank you.

InconvenientCounterParty's picture

Engineered exploitation of humans and biologically destructive hoarding of the planet's resources is the definition of freedom.

why do you hate freedom sir?

MunX's picture

I feel more in the dark about the future today then I have in a long time.

Jayda1850's picture

the sad part is that we all know where this is headed, but everytime you try to fight the fed you get smashed. I'm contemplating just throwing in the towel and buying until dow 36,000.  This has become a total farce.

NotApplicable's picture

Go for it.

You won't beat inflation, plus, you'll feed the tax beast on your nominal "gains."

Why wouldn't you throw in the towel and just buy physical PMs?

Jayda1850's picture

Dont get me wrong, I'm definitely long physical. One of my most prized possessions is a 1/2 pint sterling flask, but as we see today TPTB control the paper price of PM's. Anytime they want to suppress the price they know what to do, in case you havent noticed PM holders get smashed almost on a monthly basis fighting the fed. Granted i shouldnt be playing in a fixed casino, but where else can I get yield.

ChacoFunFact's picture

For years the only game in town has been sovereign debt/treasuries so what they price as the i rate at various maturies becomes everybody's reality.  you don't hear about a consortium of broker dealers taking over the debt of LTCM-like failures anymore.  If the credit markets outside of sovereigns slowly return to their regularly sized place they will relfect the private market vote for what i rates could/should be at various maturities.  then man's faith in man can begin flowing again.

right now there is too much weight towards the rudder of the ship where the rudder = The Fed (or lender-of-last-resort).  The ship = the money-as-debt economy (call a spade a spade).  So The Fed can't push anything anywhere even though it owns the rudder, the bow is above the water.  If this normalizes there will be much more control.  Right now all the fed can do are wheelies in the water. 

if the DC captains could incentivize private lending through tax breaks to credit unions, for example, they could help nudge the ballast to a more favorable position, but not if the ship is pointing straight up.  Since work = force/distance, it could make for an interesting 'nudge' straight up.  Better to spread the force over distance to accomplish the work.  the DC captains need to stop worrying so much about themselves and do something for the people.  It won't hurt. 


ziggy59's picture

Bizarro World does the same..

JohnKozac's picture

Pensions push state to insolvency


As the $17 billion annual taxpayer tab for government employees’ pensions and retiree health care increases at a rate of “several billion dollars” a year, Orange County Supervisor John Moorlach says California is heading for an “economic meltdown.”

Joebloinvestor's picture

Don't forget STERILIZATION, the "cure all" for when things get so fucked up they can't be "fixed".


Carbon Skidmark's picture

And this will probably continue to work doesn't


Wakanda's picture

Who cares?  We live in Bizarro World!

Do you know what day it is - every year on March 14th?

It's Steak and Blowjob Day!

Carbon Skidmark's picture

I thought it was Pi know Pi = 3.14 since today is 3/14...I could sure go for a nice steak though

NotApplicable's picture

I keep telling people that Pi Day isn't for three more years. But we've got over a dozen pies in the break room, so I'm not complaining too loudly.

Is it naptime yet?

grid-b-gone's picture

Corporate taxes are due tomorrow 3/15. If you are not aware of this, your personal plan may be missing a key component.

aleph0's picture

Great articulation as usual .

Believe it or not , there are some people out there (not here) that are still arguing about how to change the taxation system ...
... or which "party" to vote for  ..... as if it's their only problem .

NotApplicable's picture

Personally I'm in favor of a FAIR tax where everyone pays but me.

e92335i08's picture

That pretty much sums up the world. The thing that sucks is living when you know the end game and the system is flawed and will fail. Its like why go to a casino if you knew you never had a chance of winning at all. If that was the case then there would be no casinos.

At the point where the people in the world realize that the monetary is rigged and broken, it will already be to late they will already be living in the streets and suffering.

NotApplicable's picture

They don't even understand that money is nothing but an IOU, so there's not much hope of them realizing how the system is rigged. Or worse yet, the MSM will lead them to false conclusions and they'll demand a "fix" that will make it all worse, like say a global fiat currency.

TeresaE's picture

Who is "going to" pay?  How silly.

We are already paying.  As in "we" the non-pensioned, self-investing, credit extended, less working, fewer business and opportunity middle class.  Soon to be followed by the union-protected & government paid class.  Going to get real ugly, real fast.

We have paid with our small businesses, their former 75% of all private jobs (last century, now less than 45% - and I think that is bullshit), our jobs, our homes, our savings, and our necessities budgets.

At this point I've realized sheep are never going to be anything but sheep, and the money is too good/easy for those that could fix it, to do it.

Going down.  Fiat on.

CitizenZeus's picture

Oh, yes in terms of "paying the piper," the working class and small business, the bread and butter of national wealth are taking it in the gut in exchange for the do-badders who are using us for shields.  That is clear, but that is an experiential "paying".  Who is going to financially pay for baby boomer health care when they try to liquidate their empty shell mutual funds?  Sure, an attempt will be made to add more debt and increase more taxes, but at a certain point it just breaks down mathematically, and that point has been heightened by delay created by all the "extend and pretend" creativity.  Real lacks and shortages are showing up as a result of abuse of productivity and resources. Zeus

monopoly's picture

Well done.


Check out AAPL. Is this the turn in the markets? Feels different. 2 hours to go. 

A Lunatic's picture

Somebody should do something.   



dick cheneys ghost's picture

Thin air baby, Thin air...........

It was not me's picture

My account executive from Armada Markets: If you trade with Russian RTS index futures and you were not screwed today then you are a lucky son of a bitch.

sbenard's picture

This should be required reading for every American!

Calamity is certainty! Plan and prepare accordingly!

Quinvarius's picture

The debt part is just the lie to justify the printing, which is all that is really going on.  And the longer you believe the lie, the more off debt money creation you have to do.

sessinpo's picture

Just watched former goldman sucks executive and secretary of the treasury, robert rubin say that he thinks the eu probably bought less then a year's time. (check it out if you can find the video. c-span altantic wire economic summit. was being interviewed from about 2:15 pm est to now )still watching and its 2:35 pm est.


edit: 2:52 pm

For anyone interested. I have found a direct link to just his (rubin's) interview. Interview was about 35 minutes long.

earleflorida's picture

nothing to add to your excellent piece, but a big thankyou :-))

catacl1sm's picture

WTF is up with silver today? Buy opportunity. damn, I wish I wasn't broke. :(

rsnoble's picture

Depressing.  For those of us that think we are prepared.......we are in the same cage with millions of those that will be willing to do anything to survive. Not good.  Hard telling what the gov't response would be.  Instead of let's try to just survive it will probably be more like Send the Drones!!

People in the US aren't going to take lightly to living like a stray dog.

Bansters-in-my- feces's picture


Are you a terrorist?...