Don't Take Your Eyes Off The Chairman

Charles Hugh Smith, who writes at oftwominds.com, posted a brilliant piece on the economy and the debt crisis today.  It is called "Poverty In America, Pt 1."   I recommend reading the whole thing, but here are a few tidbits from it:

As of August 2011, it will be three years since the global financial meltdown. In three years, the Savior State has borrowed and blown $6 trillion maintaining the Status Quo, and the Federal Reserve has printed almost $3 trillion and shoveled that vast sum into "risk assets" to keep housing on life support and the stock market rising. The Fed has also devalued and debased the dollar, stealing wealth from the citizenry and holders of U.S.-denominated debt in the process, to serve two goals: 1) spark inflation and thus avoid deflationary deleveraging of the nation's fast-growing mountain of debt, and 2) to enable servicing that debt with cheaper dollars.

The crumbling of the credit-bubble economy has mortally wounded the middle class, and this has created a serious problem for the Power Elites. In extending the credit-bubble economy--that is, "wealth" is created via exponential expansion of debt--to housing, the Power Elites undermined the multigenerational bedrock of middle class wealth.
With housing equity stripped away, the erosion of middle class income and non-housing wealth has now been exposed.
The Power Elites' other wealth technique, globalization, has also gutted the middle class below the top 10% level of technocrats, and decimated the working class that had aspirations of joining the middle class, i.e. the lower middle class. 

The Power Elites' response--borrow and blow trillions to prop up the engine of their own wealth, the banks, borrow trillions from future taxpayers to maintain the current Status Quo, and devalue the U.S. dollar--have all failed to reflate housing or middle class incomes. Rather, these actions only succeeded in enriching the top 10% who own the majority of stocks. The prop-job in stocks has yielded a propaganda coup, as the Status Quo has successfully identified a rising stock market as "proof the recovery is here," but this propaganda is starting to wear thin as 90% of the populace are realizing they are still poorer than they were three years ago.

The Power Elites cannot understand why making credit cheap isn't creating jobs. Like decrepit generals fighting the last war, they keep sending waves of credit into the system to overpower deflation and reignite "animal spirits," but the waves of credit are being mowed down by deleveraging and the exhaustion of credit as a stimulus.
In other words, they are clueless to the reality that conventional economics has failed. They have no Plan B. Their only plan, such as it is, is to borrow more money and spend it propping up the current Status Quo. Unfortunately for them, the middle class is unraveling at the edges, and the surest evidence of that is the loss of middle class jobs.
Without good-paying jobs with benefits and rising housing equity, then the citizens have no stake left in the Status Quo.

The problem is that the Status Quo has overshot systemic equilibrium. To keep the game going, the debt load is rising at almost $2 trillion a year at the Federal Level, and the Fed's manipulations are requiring a cool trillion a year in printed money shoveled into risk assets.
The interest on that skyrocketing debt will eventually crimp the borrowing binge, and the Fed's games are igniting not job growth but inflation, which further saps what's left of middle class purchasing power.
The Fed's manic manipulations are losing their effectiveness. Like insulin in a pre-diabetic patient, the Fed's massive injections of money are not stimulating jobs or productive investment; each new announcement of "easing" generates a smaller jolt of ever-shorter duration. At some point the economy will respond to the Fed's "easing" injection by going straight into diabetic shock.

As the debate or battle over the debt ceiling is waged on one front, we have to keep an eye on what Bernanke and Geithner are doing, and not be distracted.   Because it would be easy to miss that more QE is occurring as we speak.