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In seven years as a sell-side analyst (covering oilfield service and equipment equities), I became proficient in creating and maintaining financial models, a skill set regularly utilized in accounting.  Such “models” are detailed, interdependent spreadsheets relying on literally hundreds of formulas to calculate a firm’s projected income statement, balance sheet, and cash flow statement.  It took years to master this art, and I wish I could attach one to show you what I mean.

Maintaining a complex model requires patience and diligence, as a tiny error can render it worthless.  Linking to last year’s tax rate – for example – could mean the difference between success and catastrophe when making investment recommendations, so I’ll give you a hint how many “analysts” make such projections – by plagiarizing others, creating a self-fulfilling loop of misinformation.

However, it’s one thing to have a model with erroneous formulas and otherwise fixable errors, and another to have one with fatal flaws.  In seven years of building models, I came across all sorts of problems – running the entire gamut above – but none so lethal as “CIRCULAR LOGIC.”

Circular References in Excel 1

In essence, circular logic refers to a situation where two cells rely on each other, nullifying the underlying tenet of financial modeling – CAUSE AND EFFECT.  In other words, trying to project earnings – or ANYTHING, for that matter – based on an impossible scenario, such as gargantuan growth of the current global PONZI SCHEME economy.

A PONZI SCHEME, by definition, is the ultimate case of circular logic, as the only way to increase its size is by creating an inherently weaker structure, which ultimately MUST collapse.  That is EXACTLY what a fiat currency system is – one in which only MORE PRINTED MONEY can prevent spontaneous collapse, creating a weakened structure that will only implode more spectacularly with the creation of each incremental unit.

When I first mentioned “CIRCULAR LOGIC” last week, I referred to the “Axis of Evil” in New York and Washington trying to foster a false PERCEPTION of economic growth.  They have inadvertently pushed oil prices to record highs with hyperinflationary monetary and fiscal policy – and war drum beating – and hyped a “recovery” to prevent social PANIC and boost Obama’s re-election chances.  Meanwhile, they have manipulated PAPER PM prices, interest rates, and CPI statistics lower to create the fallacious PERCEPTION of “low inflation,” buying 61% of ALL incremental Treasury supply while simultaneously promoting the consideration of an END to QE.

Wherein lies the rub.

As you can see, the last paragraph contains so much “CIRCULAR LOGIC,” my head is spinning.  If I was running a financial model utilizing such assumptions, it would immediately crash as its circuits realize the inputs contradict.  Or, in Hollywood context, Marisa Tomei’s conundrum in My Cousin Vinnie when asked a question fraught with such “CIRCULAR LOGIC” (time stamp 3:20).

My Cousin Vinny

In essence, I am referring to a bunch of Keystone Kops that think they can fix anything and everything with MONEY PRINTING, MARKET MANIPULATION, and PROPAGANDA, defying all economic LAWS in their wake.  Unfortunately, there is no way to float a PERCEPTION of “low inflation” when you are OVERTLY PRINTING MONEY to buy Treasury bonds, which in turn creates the liquidity that drives oil and other commodity prices higher.  Better yet, if you are going to drive PM prices below their equilibrium level by naked shorting PAPER contracts, all you will do is create MASSIVE PHYSICAL DEMAND for unbacked PAPER contracts, per what the “London Trader” described just last week.

London Trader – Fed’s Global War against Gold escalating

In essence, the U.S. GOVERNMENT – and its cohorts in EUROPE and JAPAN – have been playing the highest staked game of “chicken” in world history, although in “chicken” you at least have a slim chance of survival, whilst in a GLOBAL FIAT PONZI SCHEME, you have NONE!

I cannot scream loud enough of the imminent dangers of economic FREEFALL, financial COLLAPSE, and HYPERINFLATION as this “CIRCULAR LOGIC” unravels in the coming months.