Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.


The protesters on Wall Street shouldn’t be patronized. Though they may not be financial sophisticates and they don’t know how to articulate a coherent message, they are absolutely – unquestionably – intuitively correct in directing their protest against the banking system.

Conceptually and now practically, a fractionally-reserved lending system combined with an uncollateralized currency allows governments, central banks and private banks to issue infinite credit to themselves. Briefly, credit/debt is “when-issued” money; a dollar of credit today demands the creation of a dollar tomorrow. According to the Fed there is currently about $53 trillion in outstanding dollar-denominated claims and only $2.7 trillion (after QE2) of base money (M0, or bank reserves held at the Fed and currency in circulation). In other words, the entire US monetary system remains levered about 20 to 1. Put another way, there is about $53 trillion in debt and not quite $3 trillion with which to repay it.

Please notice the scale on the left axes of the two graphs below:

We are not all in this together because our monetary system is grossly inequitable. Credit is created from thin air if a borrower can be found. Governments are always willing takers of credit because it allows them to fund legislative priorities. Consumers have also been willing debt assumers because they have been able to use it to improve their near-term standard of living. Meanwhile, private sector debt = bank system assets (two sides of the same coin). Banks have incentive to grow. Therefore, banks have incentive to continually extend credit regardless of borrower creditworthiness. When a bank makes a loan there is no incentive for it to ever be repaid, by creditor or debtor.

Further, term-credit provided to homeowners and other holders of long-term debt obligations is mismatched — funded in the public sector through future tax receipts (further and further into the future), and funded in the private sector through overnight repurchase agreements, commercial paper, checking accounts, demand deposits and passive pension fund bond allocations. So then we have very leveraged economies funded virtually overnight by our central banks. This is the point of criticality on which our real economies rely.

So it’s easy to understand how and why our economies have become so leveraged. But why are protesters starting to gather?

A wage earner – whether he or she self-identifies as progressive or conservative – can no longer save his or her wage and hope to keep his or her purchasing power. Why? Because more money has to be created simply to service already outstanding debt. As the Fed has created more money since 2008, (and given the vast majority of it to creditor banks, not debtors), the purchasing power of a wage-earner’s dollar has diminished in terms of food, energy and other goods and services that do not require credit for consumption (i.e. nominal prices are rising at the supermarket and gas pump but home prices are falling). This is perfectly logical.

The real economy is now naturally compelled to de-lever. There are only two ways to de-lever: 1) let credit naturally deteriorate, or 2) print money. The numerator (debt) and denominator (base money) must be reduced. Money creation is far more socially and politically expedient because debt deterioration would mean rising unemployment and bankruptcies, not to mention bank asset deterioration. Money printing, on the other hand, promises to ease the burden of repaying private sector debt loads ONLY IF the new money reaches private sector debtors. So far the new money has only gone to the banking system.

There is a far more fundamental aspect to the workings of our monetary system that is also clearly inequitable. Our markets and economy are no longer producing capital (sustainable wealth and resources). Leverage has marginalized real growth. Further asset price increases can only be catalyzed by further credit or money growth – enough to turn de-leveraging into re-leveraging. A growing percentage of people in Europe and the US are discovering that the economy in which they are ostensibly participating has been serving at the pleasure of a very small class of professional leveragers. What protesters seem to intuit is that the banking system has all the power and that it is taking care of its own.

For those of you who self-identify as progressives, you should re-think your defense of the current system. Money printing is a terribly regressive tax on the working and middle classes. Those with higher incomes and access to credit remain able to maintain their demand for inelastic goods and services, as well as maintain their ability to service debts, while lower wage earners, those with less access to credit, and those losing jobs as the real economy shrinks, are suffering. For those of you who self-identify as “free-market conservatives”, you should also re-think your support of the current system. “Free markets” are compelled to de-leverage presently, not to re-leverage. A more laissez faire regulatory environment and lower taxes do not address the fundamental problem, which is an abundance of credit that re-distributes wealth from the factors of production to the leveragers.

So…this humble fund manager doesn’t get the displayed ignorance of the financial press when it comes to linking the incentives of various constituencies – banks, policy makers, employers, investors, Occupy Wall Street, the Tea Party and, it must be acknowledged, the established media itself. Judging purely as an outsider and at the risk of oversimplifying, it seems that Wall Street, Washington, investors and established media are on one side while the real economy and “fringe movements” are on the other. What the establishment doesn’t seem to get is that the “fringe” is a burgeoning growth industry with moral clarity on its side. So, it seems to me the kids downtown are credible and the “vocal fringe” is actually representing a disenfranchised majority that is quickly growing disenchanted with “reasonable centrism”.

Don’t trust me. Find the smartest non-partisan academic historians, sociologists, economists and philosophers in your rolodex and ask them to help connect the dots. Then ask bank economists, market strategists, partisan think-tanks, policy makers and financiers. I think it’s wise to bet with the findings of the former group because the self-selected latter group’s can’t, by definition, see change.

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Brodsky on Media Coverage of Wall Street Protesters”

  1. JesseLivermore says:

    It seems very strange to try to tie these protests to diminishing purchasing power of savings. Despite the expansion of the monetary base, inflation has been quite low. People are not mad because they’re paying 2% more for their hamburgers. They’re mad because the system is fundamentally and spectacularly unfair. The bankers get billions of dollars for gambling with the real economy. If they lose, as in 2008, the real economy suffers and the government bails out the banks. And despite everything that happened in 2008, there has been NO real reform. The same people are in charge. And the system could fail again this year, with the same results.

  2. Greg0658 says:

    furthermore .. 401Ks and pension promises are future debts in the pool to be freely used now .. and used where seemingly most effective > on foreign cheap labor soils & a new batch of rising consumers/competitors

    what a plan my parents endorsed .. thanks mom its been a hoot .. really :-) it has .. some of my younger neighbors :-| not so much .. I’ve been doing all I can – I’m so sorry :-(

  3. prbon says:

    This analysis is not consistent with the graphs. The leverage ratio has ranged from 37-50:1 in1985 to 2005 period. In the period 2005 – 2008 the ratio was between 50 – 60:1. Subsequently the ratio has dropped to the range of 20-30:1.

    The conclusions may be valid but they do not appear to be justified by the data.

  4. Frilton Miedman says:

    “The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”

    – Marriner Eccles, Fed chair 1934-1948

  5. prbon says:

    The conclusion may be valid but the leverage ratio has typically ranged from 35-50:1. It peaked at 60:1 in April of 2008 and has subsequently dropped to 20:1. Therefore, I am not sure that the data supports the conclusion.

  6. theexpertisin says:

    Well, I will patronize the ignorance of many of these demonstrators (paid and unpaid to show up). They are useful idiots.

    What I truly believe is that this is but a dress rehearsal for larger acts nationwide beginning in late spring and accelerating up through the fall. Strategy? Blame corporations and deflect from Obama. If this were a sitting Republican President they would be at the White House gates.

    The Obama re-election team and their cohorts are orchestrating and funding this effort, no doubt.

    Spontaneous demontrations? Like hell.

  7. Aloysius says:

    It strikes me that those with their heads in the sand (and possibly noses in the air) are more than likely to be “first against the wall when the revolution comes”. Rationalizations about Obama-led conspiracies might help you get through the day for now, but they only hide irrational decision making, and can’t protect you forever from confronting reality.
    BTW, when corporations are no longer serving people, they are also no longer serving a purpose, inasmuch as they cannot exist without them. Much as they might try.

  8. spragus says:

    yeah, but the issue here is that there is no relationship between the 2 charts. We are in a liquidity trap and monetary policy is ineffectual. Debt is being liquidated and that is the story. Unless inflation can offset the liquidation, real economic growth is some ways off.

  9. Aloysius says:

    The charts are bogus. Or rather, irrelevant. As is the discussion about debt, liquidity, inflation, etc. There is really only one relevant fact: $53 trillion can’t be paid back by less than $3 trillion. I know that no one expected it to, but now there are enormous social implications, and while the cause may have been monetary policy, or profligate banks, or bad bets, or whatever… the result is social upheaval, and the end result of that will have little to do with economic theory of any kind.

  10. DeDude says:

    I am not sure I understand the problem with $53 trillion in debt and only $3 trillion in paper money. Lets say all creditors decided that they would no longer accept that they had “numbers on a bank account” and demanded to get little pieces of green paper instead of “numbers on a bank account”. With a fiat currency the Fed would just run the printing press full speed and produce 50 trillion new little pieces of paper so everybody could get what they wanted. I agree that the $53 trillion in debt can be a problem in itself (regardless of how much paper money is around), but I don’t see why this so-called leverage (and that seems to be a misleading term) ratio is of any relevance. After all the Fed can fix it’s leverage level by printing little green pieces of paper (who else can fix their leverage problem that easy).

  11. MayorQuimby says:


    2% compounded over FIFTEEN YEARS vs. 1% compounded wage growth = FUBAR. When exponents diverge, time is all you need to get to extremes. Middle class life is now unaffordable for your average household. Everyone is forced to live paycheck to paycheck and get see no means of “getting ahead”.


    It is not only or relevance but it goes to the heart of the ENTIRE SYSTEM.

    Fiat is NOT PRINTED MONEY. The word fiat does not mean we just wish money into existence. Fiat is backed by collateral for a loan as well as a pledge to produce something of value. Bernanke, the IMF, BIS, JOM, BAC – NO ONE has the ability to wish away debts. If we do that we go Zimbabwe overnight.

    The relevance of paper money to credit is important and something you do not understand. Paper money does not exist until it is demanded of Federal Reserve Banks. The credit supply IS the money supply so exchanging paper for credit is irrelevant. You’re just exchanging one dollar for one dollar.

  12. Aloysius says:

    What Major Quimby says. I should have included “leverage” in my list of terms. As long as you focus on rationalized elaborations along the lines of your post you miss the obvious: the fudging of actual value on paper cannot obscure the very concrete conditions created by said fudging. I’m just hoping we don’t have to go all Zimbabwe on this before the consequences are fully understood, but it scares me to see that so many are condescendingly hiding the truth behind ersatz expert explications.

  13. blackjaquekerouac says:

    it’s a political question. “what source your money ye who lords over me.” the American people are realizing not all monied politicians are created equal. some give us freedom. others enslave us. as the “info” get’s out on who’s actually keeping us safe and who isn’t de-folks are making not only their voices but their votes be heard. bailouts from the federal government to “whatevers” (the irony that the bankers are to be blamed only should be lost on no one…save for web sites deadicated to the financial services industry. HAHAHAHAHA. Parody! I get it!) is what Americans are protesting. It’s one thing if your town mayor steals from you and doesn’ get caught (the town lives on.) Quite another if a trillion dollars suddenly disappears…forever. The answer is as obvious as “are you on the side of (insert your State here)? Unless and until there is a FANATICAL defense of the taxpayer in all this then the crisis only deepens.

  14. gkm says:

    Altucher is invited to the BP Conference and this guy isn’t? There is something very wrong with that. Take a look at what Altucher wrote on the Freakonomics blog about Occupy to know what I mean.

  15. Gray Beard says:

    As some of your have pointed out, the narrowing ratio between Debt & Base Money does imply de-leveraging has already taken place. Further, all debt does not need to be extinguished so the ratio should not go to 1:1.

    The important thing to keep in mind here is that the de-leveraging that has already occurred was from base money inflation, that this inflation was precisely what has already raised prices of precious metals and global commodities with inelastic demand properties, and that we remain nowhere near close to a systemic debt:money ratio that would allow a re-leveraging of the system.

    A tripling of base money from current levels (and distributing it to debtors), might turn the current de-leveraging into a re-leveraging. I would think that is what we should expect, and with it commensurate higher prices for unlevered goods and services.