Guest Post: Why The Fed's "Silver Bullet" Won't Kill The Beast

Tyler Durden's picture

Submitted by Lance Roberts of

Why The Fed's "Silver Bullet" Won't Kill The Beast

10yr-interestrate-gdp-092211Yesterday Fed Chairman Ben Bernanke pulled out the last bullet in his arsenal reaching back almost 50 years in a hope that just maybe this "silver bullet" will kill the vampiric drain of excess debt on the economy.   Unfortunately, silver bullets don't kill vampires.   

There is more to this analogy than just the approaching Halloween season.   Our problem isn't low interest rates - it is excess debt which literally drains the demand for more credit.  The recent release of the NFIB Small Business Survey showed this as businesses stated that acces to credit is not an issue.   "Poor sales" are their number one concern and the lack of demand on their businesses do not warrant adding on more leverage.  The number of businesses currently thinking this is a "good time to expand" is at some of the lowest levels on record.  Likewise, consumers, are trying to pay down debt as worries about job security, rising food and energy costs and stagnant wages reduce their desire to consume and make debt reduction a priority.  The excess debt that has been accumulated over the last 30 years as interest rates were in a steady decline, lending standards were reduced and massive pools of available credit were supplied has now begun the inevitable unwinding process.  

10yr-interestrate-debt-092211Ben wrongfully believes that by lowering interest rates on longer dated maturities it will cut long-term interest rates boosting investment in both housing and business.  The reality is that interest rates are already at levels twice as low as they were the last time "Operation Twist" was implemented and if the lowest rates in 50 years aren't spurring a demand for credit in the economy - it is doubtful that a further decline will do the trick.  

During the previous "Operation Twist" the economy was experiencing a increasing trend of growth.   Interest rates were also steadily rising as stronger economic growth allowed for higher rates of interest to be charged.   Debt, as a function of GDP, remained well constrained at low structurally manageable levels.   However, beginning in 1980, and as we have discussed in many past blogs, the economy shifted and interest rates began a very steady descent.  This decline of interest rates led to a massive expansion of debt which ultimately sowed the seeds for slowing rate of growth in the economy.

The issue how is that we have entered into the "Japan Syndrome".  Almost 30 years ago Japan experienced their own real estate/credit bubble bust.  Japan has attempted virtually everything the Fed has tried from lowering interest rates, liquidity injections and currency deflation in order to restart their ailing economy - it has all failed.  As a result of these monetary experiments Japan has remained in a protracted economic slump.

The process of attempting to lower interest rates in a highly indebted economy is doomed to failure before it starts.  The are only a couple of things that will work to restart the economy at this phase of the game:   1) Significantly lower tax rates and simply the tax code, and; 2) drastically reduce regulations on businesses.   Even these steps won't see an immediate return to economic strength as consumers must continue the deleveraging process of their own balance sheets and increase personal savings before they can return to historically stronger consumptive patterns.   In turn, higher personal savings rates will lead to productive investment which will foster economic growth.  Unfortunately, this isn't being allowed to happen.

Today we are not only watching the Fed duplicate earlier failed policy, we are also witnessing President Obama unveiling another $457 billion "stimulus" that will raise taxes by more than $400 billion and add at least another half-trillion to our nation's already massive $14.5 trillion debt.  No one, that has the slightest bit of intelligence, believes that is the real answer to the problems that we face.  

In reality, while the Fed still clings to failed Keynesian policies and the White House to failed "spend our way to prosperity" measures - the average American is slowly being sucked dry by declining wages and rising inflation.   Those same policies combined with regulatory reform acts that are yet to be written, threats of higher taxes, poor sales and political turmoil have pushed businesses and entrepreneurs into defensive positions.   Unfortunately, those entities and individuals also happen to be the only ones that actually have the ability to create jobs - not the government.  

It is time to drive a stake into the heart of our problems - debt.   The reality that we face today is not one of a monetary nature - it is purely fiscal.   A credit induced boom has led to a massive period of malinvestment.   We must now begin to realize that this is not a normal economic recession but rather a balance sheet recession.   We must now do what is unthinkable for this administration - get out of the way and let the system clear the excesses.   The process won't be easy but eventually dawn will come, the vampires will fade into the mist and economic life can and will resume.

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flacon's picture

Silver? Bullets?

BrocilyBeef's picture

double check and double check.

spiral_eyes's picture

Bernanke has lots more bullets left. Abolishing IOER could unleash a $16 trillion inflationary flood. Then there's the global dollar flood — lending to foreign banks at zero interest. Then even more QE.

Then there are the MMT hordes who even Krugman says are too keen on the printing press. Their solution is directly printing money to buy government debt.

And as equity markets tank, Bernanke is loading up the minigun ready to spray, bitchez.

Good news for gold (and silver and canned meat) bugs, bad news for everyone else.

flacon's picture

Silvercorp up today. Glad I held on because that is my only GREEN today. :)

ElvisDog's picture

Their solution is directly printing money to buy government debt.

Don't be ridiculous. Directly printing money to buy government would have a half-life of about a week. All private lending would immediately cease. All foreign capital would immediately flee the country. In other words, you would have instant hyperinflation. If they printed money to buy the debt on any meaningful scale, they would very shortly have to buy all the debt. It would be suicide for the Fed and they know it, so they won't do it.

bid the soldiers shoot's picture


I know you're smarter than I am on this subject, but I disagree with you and will share some of my ignorance with you.

"All private lending will cease.". And what private lending are you referring to? The only serious lending I see is going for the completion of 9 figure projects that were halted mid stream in 2008 when the first poop hit the fan.  The lenders are probably getting a piece of the project in return and a huge tax write off if it doesn't fly.

"All foreign capital would immediately flee the country." Didn't we just see Der Schweiz hang out a sign saying "Foreign Capital Not Welcome?"
G 20 countries are taking their currencies down in lockstep. Foreign capital can run, but it can't hide. So it might as well say here.

When the dust from this volcano of debt settles, exporting will be the name of the game for years to come.  And exporting countries have seen the Chinese fortune cookie that says "Get fiat low; get high at nite."
American consumerism will be gone for quite some time.  Depending on how much recoverable oil there is left on the planet.

Do you like Ben Bernanke or do you want to bite his ankle?


myne's picture

I've recently started reading Minsky's "Stabilising an unstable economy"

I'm not far into it, and already his explainations of what the Fed did in 1974/5 is strikingly similar to today.

The key difference, I suppose is simple. As the editorial states, debt is a lot, lot higher now.

DormRoom's picture

better sell your silver, and buy real bullets.  Gold & Silver crash in the next few weeks.

Pants McPants's picture

Some sound analysis here.  Please, whenever possible, share with us more of your keen insight.

Prometheus the Jester's picture

Paper Gold & Silver crash in the next few weeks. There fixed it for you.

Rhodin's picture

Selling (or shorting) paper silver was indicated when it failed to exceed the August high early this month.  I chose to buy FAZ instead.  If it turns back, or if i begin to worry about my counterparty or his bank, I'll sell the FAZ and buy physical silver with the profits.

Silver is likely to test the May - June lows in the $32-33 range.  It could go lower. But whichever way this crashcade continues, faith in digital and paper instruments is likely to crumble, leaving the field to the PMs. 

re bullets:  I don't understand the need, presuming you allready have some hunting ammo and a combat pack or two for your rifle(s).  Who is after you?  Got body armour?  Without getting into tactics, how much incoming do you think you can survive?  If you do survive, won't there (in most cases) be unused bullets and weapons to acquire from those who did not?  If you have watched the reports from conflict areas, there is usually so much ammo around that people blow it off to celebrate whenever something good happens.

TzaristBondHolder's picture

Talking about Silver, why is it 7% down today???????????????????

r101958's picture

deleveraging of massive paper shorts?

SilverRhino's picture

Give it time and it will.  PM's are the ONLY thing that is retaining value over time.   The idea that a 10 year bull market just ended based on the FOMC proclamations is total bullshit. 

Ride this dip out and pick up physical on the cheap.   Right now people are shitting themselves in the paper market.  Who gives a fuck? Physical is ALWAYS worth something and trades outside the banks just fine.    

DormRoom's picture

heard the same line during the real estate bubble: "don't worry. nationally, real estate prices have never gone down in unison. real estate is a great store of wealth".

gold & silver bubble is popping.. get out while you can.

escargot's picture

Bah ha ha!  Yeah, sure, you heard that from Bernanke of course, among others.  The same ones saying that gold isn't money now.


trav7777's picture

Get out and into what?  FRNs?  ROTFL

SilverRhino's picture

Damn you're fucking stupid.   I'm going to abandon a position with 100% yield YoY for a single day's downturn.

Into WHAT? Paper?  Yeah right. 

Panafrican Funktron Robot's picture

FYI, gold at or above $1500/oz by end of year = +8% yearly gain.  Meanwhile, the S&P has to hit 1350 for the same gain.  Does this seem likely to you?  Yeah, that's what I thought.

Obaminator's picture

The ONLY way Gold and Silver "crash" is if we enter a protracted secular DEFLATION period. Which simply wont happen with a fiat US dollar policy.

Tell me this, except for the 1995-2003 Below Fair value in Gold and me One...ONE 10-yr period where the price of a gold necklace, or gold coins, or silver jewelry cost less that it did 10 yrs prior....


You CANT. Gold and Silver NATURALLY maintain their Purchasing power of durable goods and real services over any given period of time. in 10 yrs from now when a gallon of milk costs you a $20 bill, Gold will be woth 4-5X as much as now.

1 US dollar now buys you what 3 cents would buy you in 1930. However 1 oz of gold buys you roughly the same amount of stuff, as you could have purchased with i oz of gold in 1930. Look at the history.

perhaps gold and silver came up too fast, and maybe there is a correction, but they are not going back to $400/$8 / oz on ANY ongoing basis.

JohnG's picture

Look at a chart.  SSDD.  The twin 4:30, 8:30 AM beatdowns by new shorts, lets the manipulators cover old shorts at a better price.  It's JPM.  If they can't cover those shorts before 9/27, then they are forced to buy, and they die.  It really is that simple.

It's manipulation, and it will not last very much longer.

donsluck's picture

Liquidation to cover margin calls. Gold and to a lesser extent are money, very liquid, easy to sell. Once again, nothing has really changed as we move from a debt based economy to a savings based economy. Buy the dip, brother.

Hearst's picture

Silver / commodities sell off?  I'd be betting it has something to do with this


CFTC compromises of parts of speculative curbs


They basically gave these crooks the green light to keep stealing.

Rhodin's picture

Paper longs cutting their losses?  Automatic stop loss sells?  Margin calls?  And don't forget trend followers jumping on the down escalator!

trav7777's picture

Read this and understand:  in a climate of aggregate economic contraction, ANY aggregate debt is TOO MUCH DEBT because the credit in the future WILL NOT BE created to pay today's interest.

Understand that.  Debt requires growth.

DCFusor's picture


Lead: 11.34

Silver: 10.48

Gold: 19.30


Gold makes better bullets.  Silver's not even as good as lead (but a percent helps harden lead nicely, though it's an expensive way to do it).

You local gunsmith reminds you, the denser the projectile, the less rifling twist is needed for stabilization and the more efficient the projectile is ballistically.  The man with the golden gun had it backwards (which is why I originally looked it up).

pazmaker's picture

yes but it's so dang messy digging those gold bullets out of peoples flesh .......

-Michelle-'s picture

Likewise, consumers, are trying to pay down debt as worries about job security, rising food and energy costs and stagnant wages reduce their desire to consume and make debt reduction a priority.

I blame Dave Ramsey.  He is obviously an enemy of the state.

BrocilyBeef's picture

I don't think he or his wife killed their daughter.

Cognitive Dissonance's picture



It is time to drive a stake into the heart of our problems - debt. The reality that we face today is not one of a monetary nature - it is purely fiscal.

For TPTB to admit this is to willingly surrender their (illusion of) power. It - will - never - happen.

"Full speed ahead into the iceberg number one."

trav7777's picture

Pure bullshit.  It's geophysical...oil supply has peaked.

All the money in the world cannot make net production rise past this point.  Look, it's been motherfucking TRIED a ZILLION times by oil companies on individual wells, fields, and in entire countries.

You cannot print oil.

The OP's claims about Japan?  Horseshit.  Japan is FINE.  Look, what can you say about them?  SLUMP?  Ok, they haven't fucking GROWN.  That is NOT a slump!  Everything they built is still there, there's just not more more more more more.

Our basic premises and assumptions need adjusting for what reality is now.  Circumstances have changed; aggregate growth is presently not possible.

bid the soldiers shoot's picture

I agree with all your posts here.

If oil supply has peaked (and it certainly has), why wouldn't TPTB, who have a lot more riding on this game than you and I, WHY WOULDN'T THEY CRASH THE GLOBAL ECONOMY TO HALT DEMAND FOR OIL?

Or do you think they prefer to go over the lip of the event horizon sooner rather than later?

SDRII's picture

But Koo says a balance sheet recession means you need to firehose the economy with more and more stimulus?

DormRoom's picture

Koo argues for fiscal stimulus, not monetary stimulus. 

trav7777's picture


Debt is fatal if you don't grow.  Fiscal stimulus will beget monetary stimulus because there WILL BE no growth!

As long as the decline in oil production erodes our economic activity out from underneath us, there is ZERO percent chance that we can grow into the necessary credit creation to pay TODAY's interest!

DCFusor's picture

"Debt is fatal if you don't grow."  Yup, one of the better things you've said, trav.  And the entire basis of the system is co-dependent on growth and inflation on a finite planet.


No debt of any kind since 1972 - I've learned to live without it.  Total cash basis for everything.  For the longest time, people asked me how I could live like that, while I thought "How can you live like that?  Well, not for long."  Seems I was right, not that it makes me specially happy to see others in pain -- even if it is self-inflicted.  I just got lucky early, got in trouble with plastic, and said "no more, not ever" once I got out of that.  It's only been marginally harder to live that way, which makes me think no bank is TBTF in reality - it will only kill the stupids, who we can more or less do better without.

Panafrican Funktron Robot's picture

Yeah, I got my stupid out of the way and cleared up by age 24.  I consider myself very lucky, even though my early 20's were REALLY stressful.

Gold Man-Sacks's picture

Geez, you believe in Peak Oil?  Don't tell me; An Inconvient Truth is also your favorite movie, right?

Rhodin's picture

Peak Oil Production happened.  Not from lack of reserves, but because of Peak Debt causing demand destruction.  It was inevitable that it happen in some way.  Sure, the Powez That Were wanted to "manage" an early Peak, to milk for profit, that's why refinery capacity was limited.  Looks like they outsmarted themselves.  


buzzsaw99's picture

the bernank is only concerned with diminishing banker bonuses.

DormRoom's picture

uh.. It's because FISCAL stimulus is the remedy.  Monetary stimulus works during inventory-cycle recessions.  But not during a deflationary death spiral.


It'd some kind of wonderhurt how the Republicans will not pass any fiscal stimulus bill, which will likely mean more suffering for millions of American.


But heck, if you're a youth/independent disenfranchised with the sytem, you wont' come out to vote, like you did in '08, helping Obama win.  Republican win.  The Union loses.


pods's picture

The Union was lost way back in the 1860s.  Replaced by the corporate United States Of America, per the act of 1871.


SheepDog-One's picture

Then there was also the 'Emergency Banking Act' cant remember the exact date but late 1930's, where the US Corporation was declared insolvent and in receivership...most americans have no idea what they live under today.

greenbear's picture

From Wikipedia link below:

The sense of urgency was such that the act was passed with only a single copy available on the floor and most legislators voted on it without reading it.[1]

Sounds familiar.