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Guest Post: Our "Let's Pretend" Economy: Let's Pretend Financialization Hasn't Killed the Economy

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

Our "Let's Pretend" Economy: Let's Pretend Financialization Hasn't Killed the Economy

Like the bubonic plague, financialization has a lifecycle that cannot be reversed by Federal Reserve or European Central Bank intervention.

Let's pretend the Federal Reserve can force the financialization lifecycle back into expansion. Why do we need to pretend this can happen? Because the entire U.S. economy and its expansionist Central State now depends on ever-expanding financialization for its survival.

Financialization is like the bubonic plague--it constantly needs new victims as it kills off its existing hosts. Housing? Dead, killed by financialization, aided, abetted and powered by the Federal Reserve. Now the Fed wants to "save" what it already killed via financialization--housing--by buying $1 trillion in plague-infested mortgages and brute-force efforts to keep interest rates below inflation, i.e. negative rates.

Interestingly, plague, financialization and the power of the Fed all follow the same curve of emergence, expanion, maturity, stagnation and collapse. Natural systems follow S-curves, as described in this seminal paper: A Simple Model for Complex Systems.

What is financialization? Simply put, it is finance infecting and hollowing out all levels of an economy by incentivizing leverage, debt, opacity, speculation, financial fraud, collusion and the perfection of crony capitalism, i.e. financial Elites' ownership of the government's regulatory and legislative bodies. Here is another less pungent description via Wikipedia: "Financial leverage overrides capital (equity) and financial markets dominate traditional industrial economy and agricultural economics."

Here is a chart of the financialization lifecycle. Just as the plague reaches a point of maximum infection, levels off and then eventually disappears into protected pockets, financialization reached its maximum penetration in the housing bubble.

Being an intrinsically destabilizing force, financialization led to the global financial crisis of 2008. Central banks went into panic mode, printing and injecting trillions of dollars of new infectious material into the global economy in the hopes of sparking a new even grander cycle of financialization.

But you can't create a new cycle of plague when the hosts are either dead or already infected. The world has run out of sectors that can be financialized; that plague has already killed or infected every corner of the global economy.

Ironically, all the central banks' attempts to reinflate the speculative leverage-debt bubble are only hastening the disease's decline and collapse. The global markets are cheering today because the plague-riddled corpse of Greek debt has been turned into a grotesque marionette that is being made to "dance" by the European Central Bank before an audience that has been told to applaud loudly, even though the ghastly, bizarre spectacle is transparently phony.

Greek debt is already dead; it can't be reinfected and killed again, and neither can the debts of Ireland, Spain, Portugal, Italy et al. Housing is also already dead, though the still-warm body is still twitching in certain markets around the world.

Why does this cruel stage-show have to continue? Because the Federal Reserve and the other central banks will decay and disappear if financialization can't be revived. But since it can't be revived, then we are stuck with a multi-year process of decline that will inevitably end with a massive fireworks-lit finale of collapse.

 

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Thu, 03/08/2012 - 12:56 | 2236364 JPM Hater001
JPM Hater001's picture

Ok, this was all fun and games until a minute ago.

Thu, 03/08/2012 - 12:56 | 2236366 realtick
realtick's picture

Nice chart, CHS.

 

Thu, 03/08/2012 - 12:57 | 2236370 ZackAttack
ZackAttack's picture

Won't stop 'em from spending whatever real capital is left in the system to attempt to revive it, though.

Like all belief systems, it's impossible to admit there might be an alternative. If there are alternatives, the scam has no power.

Thu, 03/08/2012 - 12:59 | 2236372 duo
duo's picture

A great analogy, CHS. 

I'll add that ZIRP is the medeival bloodletting attempting to release the "vapours" of debt saturation.

Thu, 03/08/2012 - 13:04 | 2236375 Landotfree
Landotfree's picture

It didn't lead anything.

The system is simple, stupid human lend and borrow at a rate of interest until the amount of lending/borrowing has hit it's max potential.   It was game over a long time before 2008, it was over the day you guys decided to lend/borrow at rate of interest.   A bunch of blame the result instead of identifying the problem, which is why the system will start back over once this fully collapses and work the same way.

Why does this cruel stage-show have to continue?

Sorry buddy whether or not you have a central bank is not going to matter too much, I mean the reason why this will continue longer and harder than the last time... well, system is many times larger and nobody has hired a Hilter yet.

You have many decades before you reach the bottom, unless nukes are used to replace Hilter.

The only way to avoid the eventual outcome is to have infinite power.

 

Thu, 03/08/2012 - 13:08 | 2236407 duo
duo's picture

The Hebrews and Minoans had financial collapse without central banking.  Whenever the interest paymens on society's debt consume 30-35% or more of a country's productive income stream, it fails.  Always.

Since only 11% of our economy is actually producing stuff, we're way past that point.

Thu, 03/08/2012 - 13:40 | 2236520 Landotfree
Landotfree's picture

You don't need a central bank, the systems have collapsed even here in the US with no central bank.  The existence of a central bank has nothing to do with the problem.

Thu, 03/08/2012 - 13:51 | 2236565 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Agreed Landotfree. The Fed was the enabler of this financial mess, but it was the banking/financial sector that truly caused the problem. It is a corrupt relationship between the financial system and the government which continues the charade.

Thu, 03/08/2012 - 14:19 | 2236656 blunderdog
blunderdog's picture

The CB in this case is a contributor, but you're correct it is not technically *necessary.*

The CB's ability to influence interest rates increases the risk of overleveraging the economy.  If you think logically about it, interest rates should gradually climb as debt-to-income ratio increases, but in the US, we've let the Fed manipulate the system so that the reverse has occurred.

That's why we're fucked--there's no "soft fall" from the current point of overindebtedness, and the long-term solution of gradually increasing interest rates to bring down deficit spending already appears impossible.

Thu, 03/08/2012 - 14:20 | 2236660 LowProfile
LowProfile's picture

...And luckily, why this will resolve in several years, as opposed to several decades.

Thu, 03/08/2012 - 14:41 | 2236727 Seize Mars
Seize Mars's picture

Bull. The central bank is the problem.

They can't make war, charge income tax, establish a fake "media" propaganda machine or mass-bribe legislators without it.

"The system" has never collapsed without a central bank, and "the system" has always collapsed with a central bank.

Thu, 03/08/2012 - 17:02 | 2237219 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

Really?  There was no war before central banking?  I don't think so.

Mon, 03/26/2012 - 12:49 | 2291445 Seize Mars
Seize Mars's picture

Who said that? Me? I don't think so. Try again.

Thu, 03/08/2012 - 14:20 | 2236658 LowProfile
LowProfile's picture

You are ignoring that while the system is many times larger, the flow of information and funds is many multiples faster, and the greed and ineptitude of those involved...  Unimaginable.\

This won't take decades, but it won't take months, either.  CHS probably has about the right timeline.

Thu, 03/08/2012 - 12:59 | 2236376 brodix
brodix's picture

So what follows? Here is my take on what is happening and where we need to go:

http://www.exterminatingangel.com/index.php?option=com_content&task=view...

Thu, 03/08/2012 - 13:09 | 2236411 JPM Hater001
JPM Hater001's picture

I tried to read it...I'm gonna need smaller words.

Thu, 03/08/2012 - 13:11 | 2236420 banksterhater
banksterhater's picture

too fking long-winded. (CRAP)

Thu, 03/08/2012 - 13:44 | 2236540 Manthong
Manthong's picture

I liked it..

It would appeal a bit more to this crowd if it predicted some sort of violent and painful demise to the perpetrators of debt money abuse and fraud, but it did feature some valuable insights.

Thu, 03/08/2012 - 14:18 | 2236654 JPM Hater001
JPM Hater001's picture

And nothing corny like the villian dying under a million pennies.

Thu, 03/08/2012 - 14:21 | 2236662 brodix
brodix's picture

Thanks.

A big part of the problem is that most people don't think things through. They just want whatever gives them that little zap of endorphins and are tools to whoever pulls their strings.

Thu, 03/08/2012 - 13:01 | 2236381 Cojock
Cojock's picture

Commodity and equity markets have gone exactly the same way.

The banks have sold 'inflation hedging' to risk averse and passive investors who have thereby caused the very inflation they aimed to avoid. This worked for the banks because it's the investors' balance sheet taking the market risk, not theirs.

The banks make out like bandits by running a roulette wheel with ten zeroes on it for the House.

These correlated bubbles are going to collapse, and in my view the oil market bubble will be first to go once enough speculator muppets have been suckered in by Iran noise to allow the producers in the know to hedge the coming collapse.

Gasoline (temporarily) back under $2.50 before the election. Russia, Venezuela and Iran all (temporarily, but they won't know that) shafted by sub $60 oil.

What's not to like? 

Thu, 03/08/2012 - 14:21 | 2236661 espirit
espirit's picture

And... the latest from RanSquawk:

"ExxonMobil (XOM) CEO says high retail US gasoline price solely due to high crude oil prices."

So, when Oil was $100 + in November, December, or January  and  the price of gasoline kept falling?

Fodder for the Sheeples, ammo for the Warmongers.

Thu, 03/08/2012 - 13:01 | 2236382 Sophist Economicus
Sophist Economicus's picture

Once again Chuck, you have the cause and effect reversed.     The FED is the enabler of a corrupt government.    One that wants to keep taking from the productive class and distributing the resources to themselves by creating ever increasing dependence of the stupid and ignorant (aka, the 'poor') on them.

The FED CANNOT create more 'money' and wall street cannot create new financial vehicles (bond trading, FX markets, PM fractional reserve instruments, etc) without our corrupt politicans

You never want to state this because it would dislodge your heros in government.

Thu, 03/08/2012 - 13:04 | 2236391 anarchitect
anarchitect's picture

"Housing is also already dead, though the still-warm body is still twitching in certain markets around the world."

The only statement with which I take exception.  Housing is still very frothy in many markets: Australia, New Zealand, parts of Canada (mostly Vancouver and Toronto), and many places in Northern Europe.  The days of reckoning still lie ahead.  They seem inevitable but, thus far, there are only muted signs that their arrival is nigh.

Thu, 03/08/2012 - 13:06 | 2236392 JustObserving
JustObserving's picture

What about let's pretend fiat paper is money?  Gold and silver are barabaric relics.  Once you start pretending, you cannot stop.  Until reality intrudes and then you do not need toilet paper for a generation.

Thu, 03/08/2012 - 13:06 | 2236398 Sandmann
Sandmann's picture

http://www.amazon.co.uk/Treasure-Islands-Havens-Stole-World/dp/184792110...

Nicholas Shaxon has written an excellent, well referenced , substantive book on how the money system works. Governments collude with financiers, and business interests, to make and take easy options for the benefit of the wealthy. The book is truly a revelation, and does much to explain how the sub prime crisis in the US morphed inexorably as institutions wrapped their packages in ever more complex instruments, built on an avalanche of cheap money. Shocking, un-putdownable, a brilliant piece of writing. Every Economics student should read this book. It should be mandatory for all Bankers and Financial Investment people to read and understand the immorality of their profession.

 

Quite an illuminating book showing how the UK created the Offshore Bubble to replace the Empire the USA took away

Thu, 03/08/2012 - 13:11 | 2236422 falak pema
falak pema's picture

CHS says it simply. The inevitability of it now has only one alternative  issue : If you don't want to lose it all, by kicking the can until the whole thing goes Weimar and laws of diminishing returns kill the fiat pump literally, then you have to go the route of third reich; but this time its those who won who put on the pre-emptive Panzer hat of sayng "Anchluss" and Checko-Sudeten here we come! 

History looks like a repeat and Tom Paine will puke in his grave, just like all those founding fathers, if it does.

The irony of it : Its a "peacenik" President who is now playing at Septimius Severus! 

Thu, 03/08/2012 - 13:13 | 2236425 Acet
Acet's picture

"But you can't create a new cycle of plague when the hosts are either dead or already infected. The world has run out of sectors that can be financialized; that plague has already killed or infected every corner of the global economy."

Actually that is not quite right: there are still a lot of transactions that are not intermediated by financial institutions, specifically any and all cash transactions. There is thus a little bit of space for Financialization to further expand (notice the attempts by banks in many countries to deploy cashless micro-payment systems).

The only way Financials can extract a rent from cash is by exploiting it's real nature as state backed IOUs. This explains why central banks, as they become more and more dedicated to serve the interests of financial institutions in general, have have started printing money, thus extracting a rent from the cash in people's hands through devaluation.

This is the real and final stage of Financialization, and why only physical PMs and productive hard-assets can protect wealth from the coming colapse.

Thu, 03/08/2012 - 13:36 | 2236504 Angus195
Angus195's picture

I agree completely.  However, with respect to sheltering yourself in hard assets, i.e. gold and silver, never forget that these to can also be taken away, and from the looks of it, they are already licking their chops.

Your 401K are on the rader screen:

According to widespread media reports, both the U.S. Treasury Department and the Department of Labor plan are planning to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other "steady" payment streams backed by U.S. government bonds.

Link: http://moneymorning.com/2010/01/27/retirement-plans/

I firmly believe that if gold and/or silver were to reach parabolic highs (as many predict) the same would be conficated under some executive "emergency" directive.  The 'official story' would be that those 'horders of gold' are the ones responsible for all of this mess.  The mindless sheep would believe this non-sense and the vast majority would line up and turn it in - doing their civic duty, and never understanding that those to whom they hand over their gold are the very ones who destroyed the other portion of their savings.  The first to go however would be the ETFs then precious metal IRAs - very low fruit and easy to get at.

The next three years are going to be a wild ride.

As for my physical gold my story is that I already spent it on hard booze and easy women.

Thu, 03/08/2012 - 20:32 | 2237912 DaveA
DaveA's picture

This isn't 1933. The mindless sheep won't turn in their gold because they don't have any. They already cashed in their gold jewelry for $500/oz.

Imagine a policeman telling his wife, "Well honey, I'm off to help the Feds raid some more gold hoarders today. Three of us died in yesterday's raid, but after killing the whole family and searching the house, we couldn't find any gold. Then last night two more officers' homes burned down and the damn fire department didn't lift a finger to save them. They say we'll get paid soon, but with dollars worthless and gold illegal, I'm not sure what they'll pay us with. Now you and the kids stay here in the basement of the police station. It's not safe to go outside!"

In the real world, the first duty of police is to protect local citizens, who are their friends, neighbors, and fellow parishioners. If Federal agents come to plunder those citizens, the police might accidentally lead them into an ambush.

Thu, 03/08/2012 - 13:15 | 2236436 eddiebe
eddiebe's picture

Like in any con game, when confidence goes, the game is up. I feel like we're in the last inning.

Thu, 03/08/2012 - 13:22 | 2236437 DormRoom
DormRoom's picture

Financialization is a form of technology, so it should follow closely to Gartner's Hype cycle.

http://en.wikipedia.org/wiki/Hype_cycle

 

If you look @ the chart of the S&P500 from 2002, it tracks the hype cycle nicely, and would indicate that financialization has reached the state of 'productivity plateau'. 

 

Only more Central Bank printing can juice the market from here.

 

Thu, 03/08/2012 - 13:16 | 2236440 Jason T
Thu, 03/08/2012 - 13:22 | 2236463 RSloane
RSloane's picture

Ah, another flaccid penis chart.

Thu, 03/08/2012 - 13:42 | 2236533 bbq on whitehou...
bbq on whitehouse lawn's picture

Money is like a ruler in a whorehouse. its bound to cause instibility as everyone trys to create there own.

While pure barter systems are the only trade systems that are sustainable.

 

Thu, 03/08/2012 - 13:26 | 2236471 Atomizer
Thu, 03/08/2012 - 13:27 | 2236476 rosiescenario
rosiescenario's picture

Our government is just another tool in Goldmun's tool box, albeit a Crescent wrench, devised to fit a variety of nuts.

Thu, 03/08/2012 - 13:33 | 2236489 JR
JR's picture

It takes a brilliant mind to make complexity this clear. And it takes courage to go all the way to the bottom line. Thanks CHS.

Thu, 03/08/2012 - 13:43 | 2236537 ZIRPThis
ZIRPThis's picture

In related news, today's stank pile of horseshit @ Marketwatch: "Street warms to Greek tale - U.S. stocks move higher as more private bondholders appear to be prepared to swap Greece-issued debt, preventing an abrupt bond default that could have stymied the country’s second aid package." 

It's positively amazing how pervasive the stupidity is.  Anybody who puts faith in any equity or debt security at this point deserves the financial assraping they're going to receive when all of this disgusting bailout corruption finally hits the fan.  +/- on the ETA ?

Thu, 03/08/2012 - 13:43 | 2236539 brown_hornet
brown_hornet's picture

Jason-

Does that chart include gasoline delivered to China?

Thu, 03/08/2012 - 13:44 | 2236544 youngman
youngman's picture

The Central Banks are trying to goose the economy to what it was...the problem is that was a fake economy.....our real economy is probably 70% of that....that should be the new normal.....but a politician can´t say that....so they will print and inflate to make it seem like we are growing...the reality is that there will be lower wages ...less retirement benefits..less bennies in all....

Thu, 03/08/2012 - 14:05 | 2236620 capnobvious
capnobvious's picture

The way you put things here, it gets me see this issue from a whole different perspective. You really do a nice job. caderea parului

Thu, 03/08/2012 - 14:23 | 2236668 blunderdog
blunderdog's picture

  http://www.larouchepub.com/other/1999/bankers_math_2612/bankers_math_261...

Just because LaRouche is crazy doesn't mean he was WRONG.

Thu, 03/08/2012 - 14:43 | 2236742 moonshadow
moonshadow's picture

i love this 'let's pretend' series. fantastic imagery. pretty funny stuff/pretty sad stuff

Thu, 03/08/2012 - 14:51 | 2236777 Downtoolong
Downtoolong's picture

I liked the comment by Michael Lewis in a recent video clip that was posted; “The world would be a better place now if the Credit Default Swap had never been invented.” I agree. This underlines the problem I have with the financial industry too. Any new product or practice (HFT) can be implemented by almost anyone without question as long as it sells. It barely even gets challenged when those same innovations go terribly wrong. Imagine if the drug industry operated on the same terms. Any new drug invented by anyone could be marketed and sold without test trials or proof of efficacy. All that manufacturers would need to do to defend themselves against claims of fraud, negligence, and thousands of people  dying from side effects is scribe a tiny message somewhere on the inside of each capsule, “This one might kill you.” It’s Ridiculous. And by the way, when your industry can use the best practices of the drug industry as an example of how you could behave better, you know your industry really sucks.

Thu, 03/08/2012 - 15:14 | 2236865 Angus195
Angus195's picture

The drug industry does operate this way.  The FDA and big pharma are at this point one in the same.  Most drug 'studies' (I am using this word loosely) are funded by the very companies producing the drug.  Big pharma 'cooks the results' of the studies, buries the negative test results, and gets their former co-wokers at the FDA to give the drug a green light.  See here:  http://www.nakedcapitalism.com/2012/02/25244.html  Who cares who dies.  The algorithms clearly show that even with X numbers of personal injury actions a profit is still to be had.  Couple this with the ongoing rentless drive to effecuate 'tort reform' (those dammed nasty personal injury lawyers) big pharma is secussfully 'capping' their potential losses -- thus making the possibility of even more dangerous drugs entering the 'system' that much more likely.

Unfortunately, no one ever sees the fact that those damm personal injury attorneys operate as a 'check' on this on going scam; a check that is a necessary part of any capitalistic system, a 'check' which lets 'the market' weed out the bad actors.

Tort reform is just another communistic/socialistic/fascist form of 'bail out.'

Thu, 03/08/2012 - 15:15 | 2236867 Angus195
Angus195's picture

The drug industry does operate this way.  The FDA and big pharma are at this point one in the same.  Most drug 'studies' (I am using this word loosely) are funded by the very companies producing the drug.  Big pharma 'cooks the results' of the studies, buries the negative test results, and gets their former co-wokers at the FDA to give the drug a green light.  See here:  http://www.nakedcapitalism.com/2012/02/25244.html  Who cares who dies.  The algorithms clearly show that even with X numbers of personal injury actions a profit is still to be had.  Couple this with the ongoing rentless drive to effecuate 'tort reform' (those dammed nasty personal injury lawyers) big pharma is secussfully 'capping' their potential losses -- thus making the possibility of even more dangerous drugs entering the 'system' that much more likely.

Unfortunately, no one ever sees the fact that those damm personal injury attorneys operate as a 'check' on this on going scam; a check that is a necessary part of any capitalistic system, a 'check' which lets 'the market' weed out the bad actors.

Tort reform is just another communistic/socialistic/fascist form of 'bail out.'

Thu, 03/08/2012 - 15:32 | 2236905 loftgroovv
loftgroovv's picture

How long before the UK and US Goverments declare anyone holding physical gold and silver other than the state is a "terrorist".

I'll be sat here one day playing with my pile of gold (and probably my balls), only to see my face flash up on the news. Only my photo will have been edited so I have a beard and turban, and "the authorities" will be appealing for my whereabouts.

Sad, but inevitable. Bring them on....

Fri, 03/09/2012 - 08:39 | 2239120 Aquarius
Aquarius's picture

I believe - if history tells us anything at all - that the Unholy Alliance of our global "leadership" (bankers, politicians, bureaucrats and money mercenaries; the influential elite) are about to impose on all societies everything that they think is necessary and far more (read: don't think that "legality or morality" means anything here) in order to maintan the status quo for themselves - in the face of the collapsing socio-economy here, due to their incompetence and self serving agenda. This means that Stalism and Naziasm and all those failed ideologies that have gone before us, must be considered as just trials for the main event. They have now drones and will kill anybody they deem a threat or just to serve a favour for an advantage or alliance. Frogs sitting in the water, in the pan, on the fire saying it will not happen to me.

Law trumped reason,

Power trumped Law,

Only Ethics can trump Power,

The circel needs to be closed.

 

Thu, 03/08/2012 - 17:44 | 2237379 overhere2000
overhere2000's picture

 

Basically the Fed is joining the rest of american in their own version of the Native American 'Ghost Dance'

Thu, 03/08/2012 - 19:58 | 2237803 blindman
blindman's picture

need and want, to degrees, are destabilizing. one interacts
with another in search of balance or stability. this is the chain
reaction, chain of fools, chain of love or whatnot. what is
money? or charity? what is a federal reserve note?

the federal reserve note is a legal artifact, allegedly,
definitely an artifact. it is a debt note that is redeemable for
debts public and private, it is legal tender and currency.
not money, so.
a debt note is a form of a loan. what is a loan? an instability,
a need or want turned into an artifact that is recognized as an item
of some questionable worth. a loan. that is something is extended,
offered and received,
there must be two parties, one receiving the benefit and one assuming the
risk of the loss of that loaned.
the loan implies ownership of that loaned.
(anybody want to buy a bridge?)
the risk of loss, there the rub.
the fiat money systems mechanisms, parties involved,
have been removed from the risk of loss entirely
and as such they no longer bother with these calculations, concerns or
consideration. now, there is no "economy" as economy is nothing if it is
not a calculation of loss, gain and potentials thereof.
the problem with the bankers is they are frauds as they claim to
lend what they do not have, own, to people who do not know what they need
or what it is they borrow.
.
there is much more but you can fill in the holes.
here, i got this email that says it pretty well and straight away.
"
Statement by me:
Bankers deal in risk mitigation: Banks use every resource in the Power, influence and through manipulation, bribery and persuasion to create for themselves RISK_FREE environments in which to operate.

Risk-Free environments distorts the markets.

Banks do not distribute "money" (profit cum disposable income) they dispense interest attached credit.

Bankers are protected and insulated from the socio-economy; so much so they may as well be aliens that have fully captured human productivity.

Get this picture and you will comprehend the Big Picture." pjb. verbewarp, google it.
.

comment: many must get the big picture for the situation to improve.
spread the word.

Thu, 03/08/2012 - 20:53 | 2237989 blindman
blindman's picture

speaking of gold, i was driving on front street today
and this guy with a Bull Horn interjected into my ear
" we buy gold ". i didn't even have time to look at him.
i would say the campaign to drain the swamp of its gold
is getting even more aggressive.

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