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Guest Post: When the Weakest Critical Part Fails, the Machine Breaks Down

Tyler Durden's picture





 

Submitted by Charles Hugh Smith from Of Two Minds

When the Weakest Critical Part Fails, the Machine Breaks Down 

Consumer spending is the bedrock of the global economy, and consumer spending depends on expanding debt and leverage. Once that subsystem fails, consumerism and the global economy grind to a halt.

The failure of any critical subsystem in an organism triggers a catastrophic, fatal decline. It doesn't matter if the rest of the critical subsystems are functioning at optimum levels; the failure of even one essential "part" leads to death.

The metaphor is easily extended to machines, where a perfectly sound engine will fail once the oil pump ceases functioning.

The cliche is that a chain is only as strong as its weakest link. The conventional wisdom is that the U.S. economy is so large and diverse that the failure of any one part will have only limited consequences on the economy as a whole.

But this belief was undermined by the financial crisis of 2008, in which the apparently "limited" implosion of subprime mortgage debt dominoed into a full-blown global financial crisis.

Conventional wisdom confuses redundancy and complexity. The implicit foundation of the conventional view (that the U.S. economy is so large and diverse that the failure of any one subsystem will have limited negative effects) is a belief that the system's complexity offers intrinsic redundancy: that is, if one part of the economy underperforms or even vanishes, it will quickly be replaced by the expansion or emergence of some other part.

This view can be distilled down to a belief in a sort of "automated redundancy," that capital and labor that is displaced by failure in one sector will naturally flow to a replacement sector.

This belief system fails to grasp the critical roles of financialization and consumerism in the economy. The two are of course intrinsically bound together, two sides of a single coin: consumption depends on expanding credit, leverage and assets, and financialization depends on consumers' expanding debt service and collateral.

When financialization fails, the consumerist economy dies. This is what is happening in Greece, and is starting to happen in Spain and Italy.

The central banks and Central States are attempting resuscitation by issuing credit that is freed from the constraints of collateral. The basic idea here is that if credit based on collateral has failed, then let's replace it with credit backed by phantom assets, i.e. illusory collateral.

In essence, the financialization system has shifted to the realm of fantasy, where we (taxpayers, people who took out student loans, homeowners continuing to make payments on underwater mortgages, etc.) are paying very real interest on illusory debt backed by nothing.

Once this flimsy con unravels, the credibility of all institutions that participated in the con will be irrevocably destroyed. This includes the European Central Bank (ECB), the Federal Reserve, the E.U., "too big to fail" banks, and so on down the financialization line of dominoes.

Once credit ceases to expand, asset bubbles pop and consumerism grinds to a halt. And since ever-expanding consumption is the bedrock of the global economy, the global economy will also grind to a halt.

There is no magic redundancy in a complex economy that ultimately depends on the functioning of a single subsystem, financialization, i.e. the permanent (and thus eventually exponential) expansion of leverage and credit based on phantom assets and illusory limits on risk.

As noted yesterday in Financialization's Self-Destruct Sequence, the one critical subsystem of the economy (along with liquid petroleum fuels) is self-destructing before our eyes if we look beneath the surface chatter of propaganda, bogus official statistics and officially sanctioned manipulation of stock, bond and currency markets.

As I observed in We Are All Muppets Now, everyone with a stake in the Status Quo wants the resuscitation/reflation to succeed, by whatever means are necessary, lest their piece of the pie vanish along with the phantom assets and illusory guarantees.

These expectations of security and wealth have been slowly raised to lofty, impossible-to-meet heights, and the inability to meet those expectations will inevitably lead to the wholesale destruction of institutional credibility: Heightened Expectations and the Collapse of Credibility.

Everyone who benefits from the continuation of financialization hopes it will continue expanding and thus save their piece of the Status Quo. But systems that self-destruct by their very nature cannot be fixed by waving dead chickens around and declaring "we will do whatever it takes to save the Status Quo."

This magical-thinking Cargo Cult mentality is the result of expectations exceeding the resources and surpluses of the real world: rather than accept losses, we prefer to place our faith in "leaders" who have painted radio dials on rocks and are busy declaring that they are now in contact with the gods of permanent prosperity, and that the gods will magically restore the broken machine.

Alas, it's all artifice, theater and stage tricks: the assets are still phantom, the collateral nonexistent, the guarantees empty and the power illusory.

 


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Fri, 08/17/2012 - 13:10 | Link to Comment falak pema
falak pema's picture

yawn, nothing new on the western front.

The hottest news is pussy banging in Moscow! What a bunch of lousy inquisitorial freaks!

Imagine locking up a girl for 2 years  just for shouting against Vlad and the church.

Fri, 08/17/2012 - 13:15 | Link to Comment redpill
redpill's picture

 

Friday Humor: 3 Reasons Why This Rally Is Real and Will Last

 

http://finance.yahoo.com/blogs/breakout/3-reasons-why-rally-real-last-160442234.html

 

Quite possibly the most ridiculous thing I've ever seen on Yahoo! Finance, and THAT is saying something.

 

Fri, 08/17/2012 - 13:25 | Link to Comment buzzsaw99
buzzsaw99's picture

devoid of substance and a typo too. i guess we're just supposed to read the headline. matt nesto, lulz

Fri, 08/17/2012 - 13:52 | Link to Comment SWRichmond
SWRichmond's picture

The central banks and Central States are attempting resuscitation by issuing credit that is freed from the constraints of collateral.

 

Of course the MIC is going to try to refi itself via fraud.  There is no other course reminaing for them.

MEFO Bills.

http://seekingalpha.com/instablog/199165-sw-richmond/434021-hjalmar-scha...

Fri, 08/17/2012 - 14:03 | Link to Comment Dalago
Dalago's picture

Retail.   The tip of the dick of the iceberg.

Fri, 08/17/2012 - 16:20 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

@ SWRichmond,

 

Schact's bonds were bought on the basis that the proceeds would be used to re-arm Germany and then Germany would generate war booty by conquering Soviet Russia. This is a possible course for the MIC.

Fri, 08/17/2012 - 19:48 | Link to Comment robobbob
robobbob's picture

Many of the bonds were not bought at all. Companies doing business with the government were sometimes forced to accept bonds as payment in lieu of cash. To make the experience even more fun, some bonds came interest free, and or with very restrictive terms and dates for redemption. A blackmarket arose to convert them to cash, but thats another story.

This shell game served several purposes, such as to allow the government to buy much more than they could have afforded otherwise. Some of those things were vast stores of weapons. Not talked about was the economic miracle that helped cement the Nazis power over the nation. While much of the civilized world struggled with the depression, Germans were being put to work making trains run on time. All the government expected in return was for people to do what they were told, and don't ask questions. And thats just what most of them did.

Another fancy trick was that the issuance of bonds hid the scale of rearmament from suspicious world governments who were keeping an eye on Germanys printing habits to make sure their blood money payments weren't getting inflated away.

Fri, 08/17/2012 - 13:25 | Link to Comment diogeneslaertius
diogeneslaertius's picture

a post clearly written by insane muppet unicorms

i hope the check clears

Fri, 08/17/2012 - 22:58 | Link to Comment StychoKiller
StychoKiller's picture

Does that painted-rock radio pick up stereo FM? :>D

Fri, 08/17/2012 - 13:27 | Link to Comment Hype Alert
Hype Alert's picture

Jim Paulsen?  He's always pumping the market.  Always a good time to buy.

Fri, 08/17/2012 - 13:31 | Link to Comment malikai
malikai's picture

+1 It's pretty hard to beat that.

To da moon, bitchez!

Fri, 08/17/2012 - 13:41 | Link to Comment Dreadker
Dreadker's picture

What is really inspiring is i remember reading an article like this back in 2009 and not a single comment under the article mentioned ponzi, money printing, fiat etc. etc. 

 

Its nice to see that more and more sheeple are waking up.... Still not enough, but its progress nonetheless ;-)

Fri, 08/17/2012 - 13:42 | Link to Comment aint no fortuna...
aint no fortunate son's picture

But, but, isn't "backed by the full faith and credit of the U.S. government" sufficient collateral??????????

Fri, 08/17/2012 - 14:33 | Link to Comment LMAOLORI
Fri, 08/17/2012 - 13:31 | Link to Comment Getting Old Sucks
Getting Old Sucks's picture

Heck, with our new laws and exec orders, anyone can just disappear for any reason.  Of course most will ever know about it.  

Fri, 08/17/2012 - 14:07 | Link to Comment Things that go bump
Things that go bump's picture

Yes, and they will be coming for us in the night, and if not you, your neighbor or your brother or your friend, just the way Stalin's Security Operatives did with Solzhenitsyn, but I doubt they will want to waste food on us.  They'll probably just load us in buses and take us to the nearest stadium to line us up and shoot us.   

 

"And how we burned in the camps later, thinking: What would things have been like if every Security operative, when he went out at night to make an arrest, had been uncertain whether he would return alive and had to say good-bye to his family? Or if, during periods of mass arrests, as for example in Leningrad, when they arrested a quarter of the entire city, people had not simply sat there in their lairs, paling with terror at every bang of the downstairs door and at every step on the staircase, but had understood they had nothing left to lose and had boldly set up in the downstairs hall an ambush of half a dozen people with axes, hammers, pokers, or whatever else was at hand? After all, you knew ahead of time that those bluecaps were out at night for no good purpose. And you could be sure ahead of time that you'd be cracking the skull of a cutthroat. Or what about the Black Maria sitting out there on the street with one lonely chauffeur--what if it had been driven off or its tires spikes?


The Organs would very quickly have suffered a shortage of officers and transport and, notwithstanding all of Stalin's thirst, the cursed machine would have ground to a halt! If...if... We didn't love freedom enough..."

Aleksandr I. Solzhenitsyn, The Gulag Archipelago (1973). Excerpt from Footnote 5, Chapter 1.

Fri, 08/17/2012 - 15:31 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

our goonies are not commies, comrade_tonguester

hooliganism is a crime! 

slewie'sGrrrrL.fren (recent photo)

Blind Blakeshe's in the Jailhouse Now  YouTube

 

Fri, 08/17/2012 - 16:03 | Link to Comment Things that go bump
Things that go bump's picture

Commie is as Commie does.

Fri, 08/17/2012 - 15:24 | Link to Comment Anusocracy
Anusocracy's picture

Here today, desaparecido tomorrow.

Banana Republistan

Fri, 08/17/2012 - 14:04 | Link to Comment Dalago
Dalago's picture

Boom goes the dynamite.

Fri, 08/17/2012 - 14:30 | Link to Comment magpie
magpie's picture

With all due respects to the ladies' grievances and uh artistic talents, staging such a performance in a German mosque or synagogue would have immediately incurred the believers' immediate vengeance or some bullets from the Kripo.

Fri, 08/17/2012 - 23:06 | Link to Comment jeff montanye
jeff montanye's picture

kripo?  if they could time travel.

Sat, 08/18/2012 - 09:59 | Link to Comment Cloud9.5
Fri, 08/17/2012 - 13:11 | Link to Comment fonzannoon
fonzannoon's picture

since this article was bland may I update that the CEO of perogrine just pleaded innocent.

Fri, 08/17/2012 - 13:29 | Link to Comment madcows
madcows's picture

Well, $hit, Corzine got off.  Why the Fark wouldn't he plead innocent.  Only and absolute retard would say he's guilty.

Fri, 08/17/2012 - 23:08 | Link to Comment jeff montanye
jeff montanye's picture

while jon has likely gotten off many times he is yet to be indicted.  perhaps it awaits him.  perhaps a presidential pardon (eric holder has experience).  perhaps not.  

Fri, 08/17/2012 - 13:33 | Link to Comment HyperLazy
HyperLazy's picture

Well that is bold. Usually the arraigners will only let you plead guilty or not guilty.

Fri, 08/17/2012 - 13:35 | Link to Comment fonzannoon
fonzannoon's picture

yup he went with innocent. Also you are now allowed to ground your club in the sand. Changes everywhere.

Fri, 08/17/2012 - 17:18 | Link to Comment New_Meat
New_Meat's picture

"Also you are now allowed to ground your club in the sand."

Dang, I tried that once, eeeewwwwww that hurt.

- ned

Fri, 08/17/2012 - 13:11 | Link to Comment Hype Alert
Hype Alert's picture

All I know is when cab drivers start giving you tips on what the FED is going to do...

 

Seriously, is there any financial news anywhere that doesn't involve the FED?

Fri, 08/17/2012 - 13:11 | Link to Comment Ying-Yang
Ying-Yang's picture

"gods of permanent prosperity".... Pagan?

Fri, 08/17/2012 - 15:23 | Link to Comment Dig Deeper1
Dig Deeper1's picture

Aahhhhh......People Against Goodness and Normalcy!  aka the Federal Reserve.

Fri, 08/17/2012 - 17:19 | Link to Comment New_Meat
New_Meat's picture

thank you for digging deeper.

Fri, 08/17/2012 - 13:18 | Link to Comment Tinky
Tinky's picture

While the substance will not be news to most here, this is an excellent article.

Don't forget that the vast majority are completely unaware of just how badly broken the system is, and Chuck (not the round mound of rebound) often does a good job of explaining the fundamental issues in relatively simple terms.

Fri, 08/17/2012 - 13:23 | Link to Comment nope-1004
nope-1004's picture

Agree.  At least he sticks to the issue at hand, and doesn't cloud the quality by including how good the lunch was with Prince Abdullah while on the train from Egypt to Ecuador.

Fri, 08/17/2012 - 14:45 | Link to Comment centerline
centerline's picture

The point he is making really is critical.  It actually is even larger of a problem than pointed out.  Most of our modern society has gone from robust to very fragile in terms of almost anything one can think of.

Sat, 08/18/2012 - 12:04 | Link to Comment dizzyfingers
dizzyfingers's picture

Weakest Critical Part Fails, Machine Breaks Down

Good analogy. And the smartest people in the room are just as prone to miss critical details as everyone else. Prepare for chaos, pray for rationality.

Fri, 08/17/2012 - 13:16 | Link to Comment UTICA CLUB XX PURE
UTICA CLUB XX PURE's picture

"Imagine locking up a girl for 2 years  just for shouting against Vlad and the church."

Right On Falak...

Right On...


Fri, 08/17/2012 - 13:29 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Got to watch those bearings, they fail, you have a problem.  Buy them before they fail!

Korean ones are a good choice...

EDIT:

Debt and platinum...  Up, up and away:

http://tinyurl.com/9t4223o

Fri, 08/17/2012 - 13:53 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

LOL!

Fri, 08/17/2012 - 13:19 | Link to Comment BLOTTO
BLOTTO's picture

SRT: How shall the new environment be programmed? It all happened so slowly that most men failed to realize that anything had happened at all.

~THX 1138 (1971)

Fri, 08/17/2012 - 13:24 | Link to Comment diogeneslaertius
diogeneslaertius's picture

could you be more... specific?

http://www.youtube.com/watch?v=o_8YJGdyxxE

Fri, 08/17/2012 - 13:22 | Link to Comment diogeneslaertius
diogeneslaertius's picture

a machine whose parts all respond in the same way is destined to come apart, such a crystal palace has a hidden flaw, a crack, and the proper Frequency can shatter the entire grandiose architecture

 

the artifice of a ponzi scheme collapses the moment people are AWARE it exists

 

this is the quantum rule of thumb, PERCEPTION CONDITIONS EXISTENCE

 

When financialization fails, the consumerist economy dies.

Fri, 08/17/2012 - 13:23 | Link to Comment diogeneslaertius
diogeneslaertius's picture

Dionysian Compassion: All that is Falling, I should also like to PUSH -fritz 

Fri, 08/17/2012 - 13:29 | Link to Comment Winston Churchill
Winston Churchill's picture

Pretty long winded and superficial.

Is he paid by the word ?

As before,the repo market will be the first symptom of a total failure in confidence

in the underlying collateral propping up the system.

Total blackout on repo intervention on the NY Fed site.

Why ?

Fri, 08/17/2012 - 13:29 | Link to Comment grid-b-gone
grid-b-gone's picture

Market volume already reveals that people have seen as much graft as they are willing to tolerate.

"Once this flimsy con unravels, the credibility of all institutions that participated in the con will be irrevocably destroyed."

Withdrawal from all markets was a common reaction after The Great Depression. It takes a couple generations for people to forget, which is just about where we are - about the same span as from the carpetbaggers of the late-1860's to The Great Depression.

Painters I know would find cash pinned into the folds of curtains when doing jobs for the elderly up until the 1990's. 

Daughters of one old man dismantled his small house rather than sell it to make sure all valuables were recovered from the walls.

At least five major religions have developed over the past 2,000 years, each calling for improved morality and putting community above self, but human nature continues to render them all nearly powerless to change our base instincts. 

Fri, 08/17/2012 - 13:32 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Trickle Up Bitchez

QE (quantitative easing) is essentially the printing of money and the addition of liquidity into the markets so that stock (and other asset) prices are given an artificial boost. Federal Reserve Chief Ben Bernanke believes that by pulling up stocks, the masses will feel richer and spend more on consumer goods, thus lifting up the economy. This is based on Karl Marx's reflexivity theory (George Soros essentially paraphrased Marx) that states by turning the small wheel (stocks), you can turn the big wheel (economy), which in turn will come back and turn up the small wheel (stocks). Bernanke subscribes to such a theory, and he wants QE to lift up the small wheel (stocks), which he hopes will lift up the big wheel (the economy).

Fri, 08/17/2012 - 13:59 | Link to Comment De minimus
De minimus's picture

Too bad it doesn't work that way, especially when government and their friends have inserted themselves in a controlling position and are no longer content with siphoning off just some, of the profits and now have a vampire like thirst for every last drop. 

Needless to say that they need complete control of their victims, in order to have their way and so this too is coming to pass. Courtesy of the media, who do understand what is happening and won't report it because they do have an interest in seeing this through to the end. Which they will promptly blame on any available enemy lest it fall upon them, with all the consequences that implies.

Fri, 08/17/2012 - 14:19 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

De minimus

 

That was my point apparently too many people here don't recognize the art of sarcasim or they just don't like me pointing out Marx with obama being a Marxist

Chance of Fed Printing More Money Jumps to 60%

http://www.foxbusiness.com/industries/2012/08/17/chance-fed-printing-more-money-jumps-to-60/#ixzz23ooGvYxH

Fri, 08/17/2012 - 14:22 | Link to Comment PiratePawpaw
PiratePawpaw's picture

You forgot to turn on your Sarcasm Indicator....

No worries, happens to me all the time.

Fri, 08/17/2012 - 13:37 | Link to Comment gookempucky
gookempucky's picture

ICI writes all the rules.

http://www.ici.org/pdf/24437.pdf

Lets not leave out Knight--fromm 2010

http://www.sec.gov/comments/265-26/265-26-20.pdf

All the blather from ICI

http://ici.org/pdf/12_house_cap_mkts.pdf

 

Fri, 08/17/2012 - 13:35 | Link to Comment youngman
youngman's picture

Collapse of Credibility......that is the key...they are losing it fast....the Corzine deal...the Facebook deal...HFT´s.....and on and on....people are losing faith...look at the volumes....way way down...

Fri, 08/17/2012 - 16:37 | Link to Comment falak pema
falak pema's picture

robo trader would laff at u! Apple and stocks have never been higher.

And Draghi is laffing his head off. August is a hot bubbly month! 

What credibility gap? lol! Wait till september to get bearrrrrrishhhhh! 

Fri, 08/17/2012 - 13:41 | Link to Comment BobPaulson
BobPaulson's picture

To say that these assets are not backed by anything is not true. They are backed by a massive arsenal of ICBMs, a huge carrier fleet at about a million armed service personnel.

Fri, 08/17/2012 - 13:48 | Link to Comment Winston Churchill
Winston Churchill's picture

The same could be said about every great empire,changing the weapons platforms

of course.

It did not save any of them , because of the corruption of the core.

We are as corrupt as you can get now ,and they do not even try to hide it.

Everyone is trying to loot their piece before it goes POOF.

 

Fri, 08/17/2012 - 16:07 | Link to Comment viahj
viahj's picture

WC said "Everyone is trying to loot their piece before it goes POOF."

EXACTLY.

Sat, 08/18/2012 - 05:37 | Link to Comment Offthebeach
Offthebeach's picture

Old Royal Spain, Rome, Imperial Russia, later the Soviets, Sha of Iran all had large militaries that ate out the wealth, weakening the economy. _

Fri, 08/17/2012 - 14:03 | Link to Comment Elmer Fudd
Elmer Fudd's picture

Only one problem with the weakiest part of the machine analogy, the world is overrun with sheeple at all levels that accept paper promises so far in the trillions, I'm starting to think it may have to get to quintillion before the herd senses any danger.  Billions is so Zimbabwe and Weimar.

Fri, 08/17/2012 - 14:06 | Link to Comment insanelysane
insanelysane's picture

Is the system broken or does it just work a different way now???

Fri, 08/17/2012 - 14:20 | Link to Comment shovelhead
shovelhead's picture

Charles,

Correct me if I'm wrong, but I get the distinct impression that you think that taking cheap money and hosing it out to anything that had a pulse and leveraging mythical assets 50x is not a sustainable methodology for long term success.

You, Sir, are a heretic and a clear and present danger to those in power who are looking out our collective well being.

 

ps. If they burn you at the stake, can I have that sweet goldtop LP?

Fri, 08/17/2012 - 19:02 | Link to Comment BigJim
BigJim's picture

 If they burn you at the stake, can I have that sweet goldtop LP

Sorry, it's been rehypothecated

Fri, 08/17/2012 - 14:23 | Link to Comment MiltonFriedmans...
MiltonFriedmansNightmare's picture

It takes awhile for credibility to collapse, but when it finally does, the end game is in place.

Martial law will not be a fun thing.

Fri, 08/17/2012 - 15:57 | Link to Comment Griffin
Griffin's picture

The US economy is like a 68 Camaro driven by Wallstreet bankers on a hole ridden highway at max speed with the engine overheating.

The regulator tries to stop them but he is no match for them after sitting in the shades eating donuts for far to long.

Reality is chasing them, with a 45 Magnum, and they only have just enough NOS in the tank for one more bailout.

http://www.youtube.com/watch?feature=endscreen&NR=1&v=nhPaWIeULKk

Fri, 08/17/2012 - 14:53 | Link to Comment adr
adr's picture

All I hear is how terrible business is right now, but how it is going to pick up this holiday.

Just like last holiday when I heard business is terrible but it will pick up in the spring.

 

Amazingly business has been terrible for a long time, but it is always going to pick up in a few months. When it doesn't that just means it will grow even better some time soon.

We need a new definition of insanity. First definition: You will always do more business than you did before.

Fri, 08/17/2012 - 16:34 | Link to Comment falak pema
falak pema's picture

well if u believe in the stock market we are doing fine; like for Apple a day keeps the doc away! 

Fri, 08/17/2012 - 17:53 | Link to Comment New_Meat
New_Meat's picture

would that b doc b?

Fri, 08/17/2012 - 15:05 | Link to Comment walküre
walküre's picture

Well that's all fine and dandy but Hyper Inflation is coming as certain as each and everyone's death but they can't afford to raise rates. Not now, not ever. Raise rates and the whole shabbang comes crashing down.

In a nutshell. So ... there you go.

Fri, 08/17/2012 - 15:10 | Link to Comment UrbanBard
UrbanBard's picture

Charles implies that propping up a failing system is a good thing. Bubbles want to pop. Why not let them?

It is money creation which causes the world’s financial systems to fail. Just as soon as the FED slacks off, then comes the bust. Busts are unpleasant to live through, but it was the unsustainable boom which created the problems. Hence, the only real cure is a reset to reality.

The FED has been provoking partial resets where money creation is backed off but not ended. This occurred even during the 1979 credit crunch when FED Chairman Paul Volcker allowed interest rates to rise to 21%. Money creation, during the credit crunch, kept the primary bankers from going bust, but that led to today’s debacle.

The bankers don’t want to solve this problem and allow a real recovery, because they will go bust without bailouts. But,  they may not have a choice. Markets are self correcting. They depend upon the gullibility of investors. When the last true believer has been pauperized, then markets must fail.

The question is what the investors will lose faith in first: the banks and stock markets or in the Dollar? That depends on what the FED does. The FED's actions are producing a stagnant economy with slowly rising prices. Prices won't stay low for long.

Stagflation depends on the FED introducing just enough money creation to keep the economy limping along. This is a high wire act. The FED could miscalculate the ongoing crises in other countries. The heavier the debt burden is, the more likely that the FED will tip one way or the other.

I prefer a deflation, but I don’t underestimate the stupidity and arrogance of central bankers.

Fri, 08/17/2012 - 15:20 | Link to Comment walküre
walküre's picture

How much of the American economy is government related spending and subsidies? That spending is based on ever increasing levels of debt with ever decreasing revenues. Twisting the long and short bonds to reduce the cost of the debt is buying some time but it's not reducing the debt levels. Decrease spending aka "austerity" is going to hurt the economy even more.

Will we have the same "markets" when US debt is 25 trillion? Because that is what is needed to just keep the meager "status quo" of our economy going forward. They can't afford to raise rates because the cost of servicing the debt is already higher than the revenues. Imagine even more debt at the same rates. Not to mention potentially higher rates.

The US is Greece but on a longer time frame and with a commonly accepted reserve currency. The US is bound by the same accounting principles that Greece was. We can manipulate the principles and pretend we have something here that will last, but in the end the math doesn't add up and it will collapse.

Fri, 08/17/2012 - 15:19 | Link to Comment linrom
linrom's picture

This is so wrong! Financialization is not the same thing as CREDIT ECONOMY. Financialization is a drag on real economy because it steals form it. It's Wall Street part of disinformation campaign to convince us that financialization is the ECONOMY--it is NOT!

Sat, 08/18/2012 - 01:13 | Link to Comment Yen Cross
Yen Cross's picture

 All said and done. That was a prophetical thread Tyler!  Nice work, and Sunday opens!

     Now the risk trade, is exposed!

  Just like "Spy Glass Hill" in Autumn!

Sat, 08/18/2012 - 04:21 | Link to Comment Pseudolus
Pseudolus's picture

Yawn...CliffNotes HighschoolMusical Smith

TL;DR

Sat, 08/18/2012 - 11:06 | Link to Comment notadouche
notadouche's picture

"One day all these machines break down.  One the machines breakdown the systems going to beakdown.  When the system breaks down it's going to be all about survival"  

Time to squeal like a pig.

Sat, 08/18/2012 - 17:00 | Link to Comment hooligan2009
hooligan2009's picture

The experience of nazi germany is instructive in the sense that it parralels the need for a fascist police state to enforce the subscription to the issue of odious public debt (that is not required by the citizens of a country for an equitable redistribution of wealth from the rich to the poor) to the corrupttion that is pervading the political system.

Picture the issue of trillions of dollars in debt to perpetuate a system that favours banks over people and the subscription of that debt, on behalf of the tax payer, to the institutions that turn tax payers into debt slaves of politicians, forever.

Debt becomes indistinuishable from cash money. There are no interest rates, you pay for consumption with either a promise to pay the bearer on demand the face value of a bank note (cash) or promise to pay the bearer in ten or twenty years the face value of a treasury note. Neither the cash or the note are worth more than paper.

The Federal Reserve, ECB, Bank of England, Bank of Japan, can pretend that printing of bank notes or exchange of electronic credits for Government bonds is not the same as issuing debt or printing, but it is. It is the issue of a promise to pay and is debt.

Hence, all money printing is debt issuance on top of the issue of Government debt. Rather than Governments at least having to account for the issue of odious debt because there is consumption within the Government sector (on perpetuating corruption mixed in with "legitimate" wealth transfer), central banks only have to keep a record of money printed. 

End of the day, unfortunately, in this transfer of welfare, not wealth, that goes for democracy these days, odious Government debt is merely an extension of private sector debt (Government and Private Sector debt are one and the same thing). Printing money never has been nor ever will be anything other than simply that, printing paper with a vague promise.

Sat, 08/18/2012 - 19:04 | Link to Comment bharat
bharat's picture

Actually, there is a solution to this problem. That is, diversion of cash flows from one sector to another. For example, reduce oil usage, and divert the money elsewhere. Hybrids, electric cars etc will help with this. Cost of capital is cheap in the U.S. Just create the money and pump into a "cash for clunkers 2.0", with emphasis on fuel economy for the replacement vehicles.

Secondly, create an export market for the hybrid drivetrains by giving cheap credit for the export customer. I would love to have a plug in Hybrid in India.

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