Monday, January 31, 2011

It's Not Game Over, But We're In Overtime

Commenting on the previous post on QE a reader asked (hat tip: shtove):  "Are you saying the Fed has managed this quite precisely - replacing lost credit with its own version, only so much and no more?"  

This is my answer:

It's not only the Fed that is "managing" this.  In fact, it's mostly the Treasury, the Chinese and the Oil Arabs who are 100% complicit in global monetary policy, even as they appear to be "mad" at the US. The Arabs are a slightly different case than the Chinese because they are one-item, one-export economies and  ruled by dictatorships, but they are not too different.  

The enormous bump in current federal budget deficits is a textbook Keynesian response to the burst bubble;  it is obviously financed by issuing Treasury bonds - and who buys them? Essentially, those with surpluses, i.e. the Chinese and the oil exporters. If they stop buying, the US economy will tank and their  own exports will come crashing down.  Simple stuff (which also explains to a great degree why Sustainability and Renewable Energy are anathema to The Establishment).
  • But the bond buyers ARE getting antsy.  It's always caveat emptor, after all.   Keep this firmly in mind, because - among other things - it explains why the Chinese President got the Full Monty treatment from Obama (e.g. State Dinner at the White House), when Bush II had given him only a working lunch a few years back (what, bagels, cream cheese and Snapple?).  The Chinese Emperors  demanded deep kowtows and memories of Empires Past are once again very much alive. (But, we should remember that the Japanese had become similarly insufferable twenty-some years ago and look what good it did them..).
Anyway, to the degree that it is able the Federal Reserve is also buying Treasurys by artificially inflating its balance sheet (i.e. by "printing" money = QE1, QE2, etc.).  Obviously, it can't buy all the extra Treasurys with "funny money" because then we will get hyperinflation and the dollar will tumble uncontrollably.  It is, therefore,  imperative that the Sino-Arabs go on buying lots and lots of Treasurys.

Foreign Purchases of Treasury, Agency and Corporate Bonds

  This Is What Happened After 2000...

The financial elites in all countries involved are smart people;  far from being naive simpletons, they are 100% aware of what the game is all about.  But they have to play by the rules and they have to listen to popular sentiment (or appear to do so).  It is crucial, therefore, that popular sentiment be shaped accordingly.  Thus,  the propaganda machine has gone into high gear, with the Anglo-American financial and media communities extremely hard at work bad-mouthing the euro.  The vital purpose is to avoid serious "competition" for bond purchases and keep the money flowing into Treasurys (and gilts, to a much smaller extent).  Inundate the crowd with breathless messages about the Euro Crisis (in capitals, of course) and the job is half done.

So, let's get this straight: there is no Euro Crisis in FACT, other than the one that is being whipped up by the likes of FT, Bloomberg, Reuters, WSJ, Roubini, Rogers and The Economist. As a reader aptly said, "Greece is a sideshow". It's smoke, pure and simple, to hide the wreck of the Anglo-American balance sheets.

That's why lately I've been focusing on debunking this Euro Crisis myth. Because once that's understood to be nonsense, the REAL debt crisis becomes quite starkly clear:


Continuing bond purchases by the Chinese and Arabs are masking reality, but when - not if - they stop buying, it's GAME OVER.   I don't know when this will be;  like all empires in decline, the ultimate bust may take a long time.  But we are in overtime right now and the "players" are still using the same old failed game plan.

I'll leave it at that, but in closing I wish to recommend a book that sheds plenty of light on how empires crumble from within.  In this case it's about the Soviet Union, but the lessons and implied warnings are universally applicable.

The Dead Hand: The Untold Story of the Cold War Arms Race and Its Dangerous Legacy deals with the Reagan-Bush/Gorbachev-Yeltsin era and reads almost like a novel.


  1. Superb blog, love it.
    Stumbled over this on the FT

  2. Having read the Anglo business press for some time, it is pretty obvious what you say about "sentiment manipulation". I also find amazing that the amount treasuries being bought by the Fed still hasn't spooked everybody.

    But that does not change the fact that things in Europe are also pretty much screwed up. Indeed if the EU was not screwed up the response to the attack you correctly depict would have been much different. Everybody fell for the PIIGS meme.

  3. Thanks for the kind words AndrewS and for the link to the FT article. Very interesting..


    Obviously the PIIGS have screwed up. But, like Orwellian animals, some have screwed up much more than others.

    For example, the UK has gone so far into the debt pit that, I believe, it is now in terminal decline. All it takes is for the eurozone to yank its business away from The City and it's curtains.

  4. The PIIGS are a diversion. Denmark is at least as screwed as Iceland! *That* will come as a sudden surprise to certain folks. After the next general election: Poof!

  5. You are so right and yet so wrong.

    Do you think the EU elites are not in bed with the City (sorry to sound so cynic)?

  6. People go to bed together for as long as it's mutually... beneficial. Once that stops, they start casting their eyes about for new partners.

    The perfidious Albionians have made a very serious mistake in attacking the euro and it will cost them very, very dearly.

  7. The events in Tunisia and in Egypt should have opened your eyes : in the end, it is all about feeding the population. This is why the Arabs will not stop echanging dollars (and euros !) for oil : dollars and euros can be exchanged with food whereas japanese yen or chinese yuan cannot(Asia can barely sustain itself from a food standpoint : just look at the export bans everytime there is a tension in the rice market). The further time passes, the stronger this effect is.
    This is why Chinese and Arabs accumulate dollars and euros : they will actually USE them in 20-50 years to feed the unavoidable population bulge they will experience. Hopefully, everybody will imitate China and implement a one-child policy to reduce the population to a more sustainable level, but it will take a century to take place. So they need A LOT.
    Therefore, don't hold your breath for "GAME OVER" as it would literally mean biting the hand they get (or will have to get) their food from.

  8. Who or what is buying Ts in Canada and the UK? Look at the numbers. The stats folks in Canada tell me that Canada, excluding CB and banks buying for their own account, was a net seller 2010 YTD through November. Theoretically unlimited purchases are supported via the Basel rules.

  9. "Continuing bond purchases by the Chinese and Arabs are masking reality, but when - not if - they stop buying, it's GAME OVER. I don't know when this will be; like all empires in decline, the ultimate bust may take a long time."

    Pardon me for not providing ample reasons for some of my following declarations, but I don't think it will take anything like a long time. A few more years, at most, and, at any time between now, and oh, say, 2015, there will likely occur a precipitous collapse into unmistakable national penury that is initiated seemingly, if not, literally, overnight. Trends that once took generations to gestate now take a mere few years
    to blossom.

    The Euro will, indeed, survive, and China stepping into the European fray to offer support-for a price, of course- should be very telling as to where the balance of power will ultimately lie.

    A final note, The Euro architecture has within it, and you don't need to look hard to find it, a bonafide gold accommodating component. I am not talking about a gold standard, but rather an acknowledgment of gold's key role as a vital stabilizer of monetary functioning.

    Match this fact with the utterances of estimable folks like Robert "Reference Point Gold" Zoellick of The World Bank, and the proclivities of those who run the Middle Kingdom, and much of the rest of Asia, not to mention The Arab oil titans, and it should suffice to suggest strongly that protection for dollar holders can be found in physical gold.

  10. Hell doesn't like gold, Edwardo.

  11. If you're going to invest in anything invest in your locality.

    Green energy and sustainable waste disposal are just two things every community needs, but only few have. Should all dire warning of total economic collapse prove shrill (as I think they inevitably do) it's still a good investment.
    Gold is pretty, and handy for making jewellery. Little else. The same money invested in setting up sustainable energy creation systems will return far more over time, creates jobs and a long term return on investment.

  12. Hell,
    I think its good that you are running a blog that at it's core is advocating for better public policy, but I believe you are mis-categorizing the nature of the Federal govts "debt" in general.

    The national ‘debt’ is what people normally call the total amount of Treasury securities issued to the public. These securities are sold so as to absorb excess reserve balances that remain in the banking system after the Treasury spends, without these sales, the banks that have the excess reserve balances would bid down the yield on overnight interbank loans to a level that is less than perhaps the monetary policy rate for interbank funds set by the FOMC, to prevent this, they sell treasury securities. These securities are (only) redeemable in the currency that the US govt issues itself (USD). The US cannot default, and cannot ever not be able to redeem these securities at maturity. This hysteria about debt and deficits is a bit misguided. It in not correct to think about the issuance of these securities as "borrowing", these securities MUST be issued in order for the Fed to maintain a non-zero policy interest rate.

    Here’s an excerpt from Warren Mosler’s free e-book The Seven Deadly Innocent Frauds of Economic Policy: “In other words, when the U.S. government does what’s called “borrowing money,” all it does is move funds from checking accounts at the Fed to savings accounts (Treasury securities) at the Fed. In fact, the entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed. And what happens when the Treasury securities come due,
    and that “debt” has to be paid back? Yes, you guessed it, the Fed merely shifts the dollar balances from the savings accounts (Treasury securities) at the Fed to the appropriate checking accounts at the Fed (reserve accounts). Nor is this anything new. It’s been done exactly like this for a very long time, and no one seems to understand how simple it is and that it never will be a problem.”

    More info for you all at:


  13. Beware MMTers.....all they care about is NOW. Utilising infantile 'theory' about how a fiat system means everything can be ours forever...and with no consequences for the future.

    Mosler is a destroyer of values - don't be fooled, hold the line.

  14. Jo,

    Your comment is incoherent. Can we stick to the realities of the accounting?

    Is my accounting wrong? If so please correct me where I'm wrong...

  15. There are several issues with viewing debt as mere "accounting".

    The obvious one is that by issuing debt that is absorbed by the Fed (QE) the supply of money increases. This may create inflation, loss of monetary soundness, etc etc.

    Another is the portion of debt that is held by foreigners. If debt is held by Americans then things are relatively easy, since debts cancel out inside the local economy (though there are now HUGE social equality problems of the 95%-5% variety). Examples are Japan and Italy that can thus sustain large public debt burdens.

    Right now the US is facing BOTH problems: QE and very large foreign purchases of its debt.

    How long can this go on? I don't know. But the structure itself is rickety and the process fundamentally unsustainable.

  16. Hell,

    "If debt is held by Americans then things are relatively easy, since debts cancel out inside the local economy "

    WRT the external sector, the accounting still holds. If China sells us something, we take possession of the asset and offset that asset with a liability. The liability can either be low/non interest bearing reserve balances or a US Treasury security, that is China's ONLY choice in the matter.

    For instance you often hear things like "what if China wants to get paid back?" That is very easy, we just ask what US bank account (reserve account) they would like the proceeds of their bond redemptions transfered into. Now China would have a bank account instead of a Treasury security. This is not a problem. A US bank account deposit is a liability (of the bank) just like a treasury security is a liability (of the govt). Same thing.

    And we have their real assets that they sold to us! In other words China HAS been paid when they, I assume voluntarily, agreed to accept USD in exchange for their real goods/services.

    The only problem comes in when our policymakers do not adjust the fiscal balance (ie the deficit) UP to make sure US employment opportunities are not hurt by the net foreign imports.

    As far as the "money supply", the quantity theory of money is no longer applicable since 1971/2 when Nixon took the US off the gold standard. We have since then operated a Free Floating Non-Convertable currency system where the concept of an economic stock measure of "money supply" is simply not applicable.

    For more information see Bill Mitchell's blog here:



  17. AndrewS, if Gold's only value is in making shiny jewelry why are the Chinese buying so much of it?

  18. I agree that in our current monetary system "it's only money". But that becomes a serious problem when the Chinese, say, decide they want to purchase something tangible with all those "it's only money" dollars, driving nominal prices through the roof.

    Or, more ominously, decide they no longer want to accept "it's only money" dollars for THEIR tangible good exports. Say.. rare earths?

  19. Hell,

    China is running about a bit over $2T GDP, US GDP is approaching 15T.

    The Chinese run about a $300B trade surplus with the US. This is about 15% of their GDP. If they decide to become importers all of a sudden, by buying "stuff" from the US, say at the level where they achieve trade balance with the US, it will result in an absolute collapse in their economy as that would result in a 15% collapse in their GDP. Political and social chaos would result over there and they will never do this therefore....

    They have made their decision to establish an export economy and are riding with us.... they are not lending us anything.


  20. This comment has been removed by the author.

  21. Matt Franko: "And we have their real assets that they sold to us!" You forgot to mention: Real assets we used to produce. Real assets we don't really need, purchased with money we don't really have.

  22. Cam,
    I recently purchased a new belt for my HVAC air handler, "Made in China" right on it. $3.87 at R.E. Michael.

    Let me tell you, I really needed it!

    and as far as things 'we used to produce' yes your concerns there have merit. Our failed policymakers refuse to see how these high external deficits lead to a collapse in employment if fiscal policy is not adjusted to correct for it....


    PS No 'money' is 'real'....

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  24. There so much paper everywhere, but it will still keep its value as people belive it.

    I would keep an eye out for the treasury yields as we move towards June, when the fed has to move out of the market.

    Di you guys see the price of silver since august it has really out performed gold. If you really want to take a position I would do it through gold.

    Silver to gold is almost at record high.

    Chart of Silver to Gold Ratio