Now the furor over QE and whatnot has been swept unceasingly into the past, the question is what happens after QE proves to be a failure?

The cliche is ‘QE 5 – 6 – 7’ but this is unlikely. Why? The failure of this iteration of Q & E will be the end of the Fed. In this real world, not the zombie world of phantom central banks and imaginary wealth, failure has consequences. Bernanke’s is a tremendous gamble. There is nothing short of desperate necessity would compel him to take it; the fact of it speaks to our clear and present dangers.

The Fed has a relevance problem which orbits around the dollar price of crude and the current $13 trillion US budget deficit. Since this latter is ongoing with no possibility of retirement in sight it is the certain target of Fed monetization. Servicing this debt since the crisis began has represented difficulties requiring the shuffling of funds between primary dealers and overseas central banks. The massive credit overhang and the effect deflation has on currency value increases both the risks and dangers of a failed Treasury auction. The solution is direct monetization but this has adverse effects on the credit market which is … uh, useful to actually price credit risks. The Fed suggests its suggested goal is to reduce lending rates and increase employment but this is a lie. The Fed risks crowding out the Treasury market so as to guarantee a bid and funds for Treasury operations.

Because of a relative shortage of 5- 10 year Treasury securities the Fed will also likely buy mortgage- backed bonds and protect the flailing mortgage business from the consequences of its own criminality.

By monetizing the Fed creates extraordinary risks that are then priced into debt in place of the demand for credit that is ordinarily priced into it. These ‘other’ risks are ones the Fed does not want to think about. By monetizing, the Fed becomes both the lender and borrower of first and last resorts. Once begun, the Fed must monetize until the end, when circumstances will not allow it anymore. This is the kind of risk that the markets will price into Treasury issues. By attempting to solve one problem the Fed creates greater downstream problems. What the Fed buys is time but the cost is very high.

Part of this new risk is showing up in 30 year Treasuries. Part is the mechanics of the trade, the rest is this default risk.

What the Fed also buys at great expense is the admission that it has no clue as to what is behind our wasting, zombie economy. Fortunately for the Fed, it and the Treasury have been monetizing US debt since the Vietnam War era. Countries that choose to monetize can do so for very long time periods, witness Japan since 1990. At the same time, doing so does not address any underlying structural issues. Since monetizing is a compounding exponential function at some level the process accelerates then breaks down. After that point borrowing to service debt is not possible.

The problem the Fed cannot hope to solve is our broken energy balance sheet, not the finance version. Servicing debts by monetizing them or burning-  excommunicating- or exorcising them will not solve the structural energy waste problems that propel the current economic malaise. Nevertheless, Bernanke is playing a clever game. He can create a distraction and hope someone else shows up with an energy solution.

He also realizes if he goes too far and monetizes too much he risks being ‘outed’ as irrelevant. He has to monetize enough to attract attention but not enough to suggest that what is doing is failing. At the same time he cannot possibly succeed as his actions have no relationship to the real problems.

Bernanke is a rodeo clown with a beard. All he can do to keep the bucked rodeo cowboy – the US economy – from being trampled is to distract the enraged bull. I almost feel sorry for the dude! That bull is going to be trampling until the end of time.

With the Treasury absent from policy and the will to legislate more fiscal funding evaporated the only support for ‘Recovery Lite’ is Bernanke and his con game.

The finance nincompoops that decry the vanishing dollar and incipient inflation are playing Barnyard Ben’s game. Perhaps he’s hired them! Without this chorus of Zero Hedge ignoramuses Bernanke would have no traction in the real world. When Marc Faber and the central bankers of China and Germany get up and squeal that QE is ruining things they are giving BB credibility that he cannot possibly earn by himself.

The actions rather than the words suggest that the wheels are in the process of falling off business as usual. Bernanke’s actions inform us that the recovery is a sham. He promotes inflation: adding more money to reserves guarantees there will be no inflation even as the recently rising oil prices also guarantee there will be no inflation.

First of all, inflation is not rising prices but increases in the supply of money.

More money stuffed into reserves creates an increasing incentive to keep these reserve funds from leaking into circulation. Inflation – or in this case, hyper- inflation – only takes place when funds are in circulation and transacting more frequently which is the ‘velocity’ of money.

As more reserves are swept into traps the increase itself represents potential inflation. That is, there would be inflation if the funds in the traps were circulated. Since releasing funds into circulation would reduce their value, they are kept in the traps at all costs. The more reserves the Fed creates the tighter the traps are that hold them.

Increased reserves guarantees that more of these reserves will be liquidated when the traps finally implode. Liquidity/currency traps are places where money goes to die. The killer is the massive overhang of unrecognized debt exposure that is on the balance sheets of the traps themselves. The amounts of the debts are far greater than the currency in the traps. Even gold is a currency trap as it is pledged as margin collateral elsewhere. Most funds in currency traps are forms of collateral for debts on the traps’ balance sheets. They aren’t called traps for nothing.

When the gold bubble- liquidity trap collapses, gold speculators will get hammered.

Getting into a trap is easy, getting out when everyone else is trying to do the same thing is fatal. If cash in accounts is trapped within insolvent banks the accounts will be frozen and rendered inaccessible. Real estate is the worst kind of currency trap. When the danger appears there will be no buyers for real estate and cash spent on it will evaporate.

In hyper- inflationary China, cash speculative purchases of apartments are likely to return nothing as the buildings themselves will revert to state ownership leaving the speculators empty handed. Lenders will be repaid in yuan that has near- zero value. These ruined lenders will ruin others in turn returning pledged collateral to the state which holds the underlying leasehold value of the land upon which the buildings themselves are erected.

The Fed cannot solve the dollar price of crude. A Fed- generated price bubble in crude can only crash when the price reaches an unsupportable level. Afterward, the price will recover from crash lows and reestablish the equilibrium price at the upper bound where any further increase destroys demand. This is the ‘value- peg’ of dollars priced in crude. Here, the dollar has real value.

Currently, there is no ‘scarcity premium’ to ubiquitous dollars which is a world- wide benefit of the dollar as reserve currency. Since dollars have this non- money value relative to other, scarcer commodity currencies it is almost impossible for the US dollar to be ‘destroyed’ by reducing is F/X value. The dollar at any exchange rate by the size of its float stabilizes fuel prices … to a point.

If the Fed was to somehow succeed and destroy the value of the dollar by widespread dollar revulsion overseas, some other currency would become pegged in value to crude in the dollar’s place. Once that happens, the US and other buyers would have to either buy that currency – at a great disadvantage to the US – or buy fuels with dollars at a discount to the pegged currency.

Buying a second currency with dollars would be extraordinarily expensive. Why? Because any other currency would be scarce in circulation relative to the dollar and this scarcity would cause its value to be bid up.

If the US was to bleed liquidity traps and start circulating more dollars to afford this price the effect would indeed be hyper- inflation and fuel would quickly become unaffordable. It’s price would rise in dollars faster than dollars could be circulated. The inevitable crash might not reduce the price of fuel because the post- crash dollars would not be competitive overseas versus the ‘other’ currency which would be held by creditor nations such as China, India, Germany and the south Asian countries. These countries have large F/X reserves and which would certainly avoid the crash outcome that dollar inflation would wreak on the US itself. For all extents and purposes the ‘death’ of the dollar would effectively put the US out of business as an industrialized nation.

Meanwhile, the dollar/crude peg is aggressively deflationary. Being exchangeable on demand for a valuable physical good the dollar does now and will have increased value. This is the inevitable outcome of physical shortage.

‘Barnyard Ben’ Bernanke’s foray into experimental monetary policy is tragic and romantic … as well as irrelevant. Regardless of his efforts the dollar/crude peg will reestablish itself at some level with dollar recognized as a defacto hard currency. At that point the deadly arbitrage between the dollar and other currencies will begin and the world’s economic activity will shrivel into little other than buying and selling money in order to obtain increasingly valuable oil. This is the exact same thing that took place during the early 1930’s and resulted in mass bank failures in the US and elsewhere and only ended when the peg between paper money and gold was broken.

As was the case then, the only escape from money- value generated deflation will be for economies to ‘go off’ oil and break the peg. There is no other way!. Reductions in the use of crude oil will be by necessity be of the order of 80- 90% of current levels of usage – the level at which the US can become a sustainable multi- year net exporter of crude oil!

The great recessions of 1973 and the early 1980’s were caused by supply reductions in the US of 10% or less. Cuba’s regression in the post- Soviet period were the outcome of import constraints on the order of <20%. The decrease suggested here is practically unimaginable. Nevertheless, only by being a multi- year net exporter will the US currency decouple from crude. Since the US currently produces 5 million bpd a longer- term export rate might be 1- 1.5 mbpd. with zero imports. Since the US currently uses 18 million bpd. the level required is tiny fraction of what the US consumes currently.

This oil price driven deflationary dilemma is at the center of Bernanke’s efforts. Oil value pegged to dollars ends in the ruin of America’s consumptive waste- based economy in an unending deflationary spiral. The dollar/fuel peg renders the Fed irrelevant. Flooding the world’s economies with reserves is Bernanke’s gambit. That it will fail is certain, but, to not make the attempt will also certainly fail.

When the dollar/crude peg is reestablished the world’s economies will scramble to find more dollars. The liquidity traps will collapse vaporizing much of the world’s dollar stock (much ‘cash’ is in the form of electrons and can be eradicated by spreadsheet as recognized debts bankrupt cash- holding entities instantaneously). As the currency traps evaporate along with their cash hoards what remains will vanish from circulation. As dollars disappear they will become more valuable in a self- reinforcing cycle. Seeking value in a value- destructive world, oil producers will prefer dollars to other currencies; dollar holders will sweep producers’ currencies from foreign exchanges and dollar black markets will emerge along with dollar preference. In order to gain hard currency inflows producers will drop the hammer on domestic consumption, declining nominal prices will bankrupt industrial producers and accomplish the same thing. Dollar conservation will become a proxy for real energy conservation. Long before this the Fed will have been put out of its misery and BB retired to an economics professorship and bitter memoirs.

In this new, asset- free America the printing of inflation and a repeat of the fuel price crash cycle would be avoided at all costs. Since the outcome of Peak Oil is shortages the balance would only exist when dollars decrease along with available fuels. America would not be bankrupt. Far from it, the US has large petroleum and other natural resources that represent exportable value. There would be no cars or luxuries in America, but it would not be Nigeria, either.

The fact of the Fed’s effort now suggests that the harsh effects of Peak Oil are to be felt imminently.

Our waste- based economy is a zombie, zombie kids playing in zombie yards. Zombie workers lurking within darkened, echoing ruins of tombstone high rises with tattered ‘Available!’ and ‘For Lease’ signs on the front. There are the zombie houses with zombie driveways filled with zombie SUVs and giant pickup trucks and the zombie family members watching their individual zombie- boxes telling them whom to eat … this is our immediate past and present and the zombie world to come which will last for a long, long time.

The tragedy of Richard Whitney who saved the stock market on Black Thursday:

All so sickeningly familiar. Whitney’s Black Thursday rescue was followed the next week by Black Monday and Black Tuesday, then a whole calendar of black days. The lights in America were not to be re- lit until the New Deal and then for almost twenty years when in 1948 the US used the Marshall Plan to recapitalize its economy by rebuilding Europe and Japan.

Now comes the latest version of Richard Whitney with his order of “205 For Steel!” He rides a pale horse like Death himself as he streaks across a sky empty of stars. He is Ben Bernanke the White Knight of Zombieland.