Charts 09-23: Reader mailbag

I decided that the blog could use a little fresh paint, so I played with the Blogger template editor a bit.  The wallpaper image at the top is Loredo Taft's "Fountain of Time" sculpture located between the University of Chicago and the barbarous and dangerous regions to the south and west of Hyde Park.

"Time goes, you say?  Ah no, Alas, time stays, we go."

Death in the "Fountain of Time"

Today's tape stayed within bounds and did not look impulsive.  We'll look for a flat pattern on this proposed wave 4.  I stay out of the way of wave 4's because they are designed to eat your theta and drink your milkshake.

SPX 09-23

Loyal reader "Joe" asks a scintillating question today:

How in the hell can our debts NOT be paid? THEY ARE DENOMINATED IN A CURRENCY WE CONTROL! WE ISSUE OUR CURRENCY BY FIAT!

Let me ask you this: where does China, Japan, etc get their dollars they use to purchase US treasuries (which is a dollar-denominated ASSET)? They come from the US!!! So how in the hell do you expect foreigners to PAY US BACK in the very currency WE control?!

This is why Karl Donglicker and the rest are so bloody wrong in their entire macro analysis. They fail to understand the nature of fiat currency. We have no fixed convertible currency to gold or anything else; our debts are denominated in our own currency, not the euro, yen, etc.

Your ready abuse of the Karl Denninger tells me that you are a serious and sophisticated man, worldly and refined.  So I will take your question seriously.

The short answer is that our crappy unbacked "fiat" currency is actually very hard indeed, backed not by PMs but by crude oil itself, by the convention of the petrodollar.  As long as oil is priced in U.S. dollars, then any owner of U.S. dollars may trade them in the world markets for liquid energy, the lifeblood of the modern world.

So the entire world scrambles to obtain them, at least they do today.  This is quite a privilege for us, but it's hardly a natural or permanent state of affairs.

[editor's note: here I was forced to work on some work stuff, but I really wanted to post the chart tonight, so I'll finish the answer in the morning.  Promise.]

The fictitious world of fiat ultimately ties back to the real world via energy, which is why the Saudi America meme is pushed so hard to the credulous by propaganda outlets like Forbes magazine.  China and Russia understand the petrodollar very well, and are positioning themselves for the post-postwar era after Bretton Woods.

A debt-based currency system reaches its maximum point and deflates .  Until the first RE bubble blew, we were able to create new credit and debt in the private sector, until it reached its own top via zero-down ARMs and MBS derivatives.  Lately, private-sector credit creation has been student loans and 8-year car loans.

QE is not raw printing, it's a last-ditch effort for the Fed to support credit creation here in the America.  Every dollar added to the balance sheet is another dollar of debt on the national tab.  It only has value due to our faith in the idea that it is money good.  This faith will falter.

I may concede your point if the Fed picks up the tab for the municipal and pension obligations in the country, as well as the derivatives book of the TBTF banks, if things continue smoothly afterwards.