“The Math is Never Wrong” -Karl Denninger
Over the course of history, things change. Cultures change, technologies change, the accepted rules of legitimacy in governance change, relative levels of prosperity change, a lot of things change. But in the field of mathematics, nothing ever changes. Whether we are talking about pre-history, ancient times, medieval times or modern times, two times two has always and will always equal four.
Yet at the beginning of this Depression, which we are living through in the United States of America and around the world, with the evidence of history staring us in the face — from the Great Depression of the 1930s all the way back to Joseph in Egypt — we continue to believe and act as if, somehow or other, we are “special.” As if the vagaries of the past somehow don’t apply to us. As if “this time is different” (a subject we will explore in depth in Part Five of this series).
In recent times the economic phenomena — which God instituted the Jubilee Year to address in ancient Israel — has come to be called the Long Wave. A cycle which, like the Jubilee, recurs within the mean life span of a human being. It is a cycle that ends in a depression. Always and inevitably. That is, for any economy that does not have a Jubilee in place, patterned after the biblical example in Leviticus 25. (No one outside ancient Israel ever has, BTW.)
The Long Wave was first described in modern times by Soviet economist Nikolai Kondratiev. Its existence has also been detected by traders who make money in the financial markets by analyzing shorter-term patterns according to the Elliot Wave principle and other kinds of technical analyses.
However, mainstream economists of the Keynesian and Monetarist schools (the former in the United States tend to be Democrats, the latter Republicans) reject the notion that any such cycle exists. And because they are considered “mainstream,” axiomatically they are the ones with the most authority and influence over the economic policies of the government.
I believe the reason that mainstream economists remain blind to the existence of the Long Wave Cycle, is because they have failed to discover a reason for it that can be described by cause-and-effect mathematically. Or recognize it even when someone has set it right in front of their faces, like a marble on a plate.
It is Karl Denninger — a trader by profession who also publishes the award winning blog The Market Ticker and rides herd on The Market Ticker Forums — who I believe has the distinction of being the first person to describe the underlying cause of the Long Wave cycle. In terms that are not very much more complicated than 2 x 2 = 4. A matter of simple multiplication.
But Mr. Denninger has not only nailed down the cause of the Long Wave Cycle to a simple mathematical certainty. He has also published his findings far-and-wide. Which means that mainstream economists, Congress, the Administration, and the Central Bank in Washington, along the individual citizens of this nation, have no excuse. We swirling around the open drain with both eyes wide open. Willfully blind.
The basic mistake that ALL mainstream economists make, whether they are Keynesian or Monetarist, is the underlying assumption that economic output ALWAYS tends toward what is called Economic Equilibrium, fluctuating only according to the vagaries of supply and demand.
According to the model that mainstream economists follow, depressions are far from regular, predictable, or inevitable events. Rather, they view depressions as economic aberrations. And the worst kind of economic aberration too, because of the damage an economic depression causes.
A depression therefore represents an aberration which — from the positions of power that mainstream economists occupy at places such as the Federal Reserve and the Department of the Treasury — they are fighting with all the fiscal and monetary tools that the government of the United States has at its disposal.
One problem. Their underlying assumption is WRONG. Depressions are in fact a regular, predictable, and inevitable phenomenon. Which is why the policies which the Federal Reserve and Treasury have followed and have cajoled the politicians in Congress into following, are not only failing abysmally during the current economic downturn. They are making it worse. FAR WORSE.
How? By neglecting the mathematics that the biblical Jubilee in Leviticus 25 addressed by canceling all debts every fifty years. The mathematics which show that the overhanging debt that looms over EVERY economy ALWAYS compounds faster than that economy’s output. A situation which, as Mr. Denninger points out in his blog post The Price of Capitalism, CANNOT be sustained.
Remember, everyone seeks a profit. Therefore, those who loan capital out will demand some price above the “risk free” return that can be obtained by simply sitting in the economy and lapping up the growth.Nobody will take an intentional loss as long as there are alternatives, and unless you steal people’s property, there are!
Therefore, there will always be a “spread.”
But look at what happens [see Figure 1]. In the first year, the “spread” between the two – the difference between the economic outcome and the lending price – is 3%. But by the fifth year that spread has grown to 21% and is accelerating rapidly – 21% is much higher than 3 x 5, or 15%.
In 10 years the spread is much worse – 63% instead of the “expected” 30%, and in 20 years its horrifying – 286%!
Because both functions are exponents (compound functions) and so long as people seek a profit it will always cost more to borrow capital than the rate of growth in the economy, as you must induce them to take a risk.
Left alone the overhang of debt will always “run away” and destroy the economic and monetary systems.
Therefore if we are to avoid a complete collapse of the economic and monetary systems there must be times when the “overhang” of bad debt defaults, lest it grow so much that nobody can make the payments and the economy is choked off.
That is exactly what has happened because our government intentionally prevented the defaults that were NECESSARY in 2000-2003 to restore balance between these two functions.
Now the pain is worse, and as you can see above, the longer you try to put it off the worse it gets. It’s bad now (about 10 years in); if we try to “kick the can” for another 10 years it will be catastrophic.
It should be as plain as the nose on my face, to anyone looking at Figure 2 who has an ounce of common sense, that an economy in which the debt is growing along the red line while the output of that economy is only growing along the blue line — that before long THE ABILITY OF THAT ECONOMY TO SERVICE ITS DEBT BECOMES IMPOSSIBLE. This graph is no aberration, however. It applies to EVERY ECONOMY THAT HAS EVER OR WILL EVER EXIST “until the day dawns and the darkness disappears.”
God commanded ancient Israel to observe a Jubilee year in Leviticus 25, so that there would be an ORDERLY liquidation of this debt overhang every fifty years. Obviously, with a date for universal debt forgiveness written in stone, no lender would ever set terms for repayment PAST the Jubilee year.
Which means as the Jubilee approached, the red line and the blue line in Figure 2 would come together in an ORDERLY fashion WITHOUT a depression. Unlike the financial panics and economic crashes that have characterized the Long Wave cycle for every other economy that has ever existed.
The chart of “Total Credit Market Debt as a Percent of GDP” (Figure 3) is illustrates a fact that every American citizen should be aware of and educated about. The chart shows the total debt of the United States economy, public and private, as a percentage of our yearly Gross Domestic Product (GDP, which is equal to our Gross Domestic Income, GDI) from 1920 to 2008.
During the WORST of Great Depression, when under Hoover and FDR the federal government was taking previously unprecedented steps to counter a Long Wave downturn, our total debt in the United States at its peak did not exceed 240% of our GDP and GDI. But at the outset of our current Depression in 2008, our total debt in the United States was ALREADY at 350% of GDP. That was before the Obama Administration began taking its own unprecedented steps to counter this Long Wave downturn. Karl Rove in the Wall Street Journal notes that:
Consider that from Jan. 20, 2001, to Jan. 20, 2009, the debt held by the public grew $3 trillion under Mr. Bush — to $6.3 trillion from $3.3 trillion at a time when the national economy grew as well.By comparison, from the day Mr. Obama took office last year to the end of the current fiscal year, according to the Office of Management and Budget, the debt held by the public will grow by $3.3 trillion. In 20 months, Mr. Obama will add as much debt as Mr. Bush ran up in eight years.
What our government is attempting to do can be likened to an alcoholic who tries to treat his drinking problem by consuming alcohol at an EIGHT TIMES FASTER RATE. The only difference being that what the American people and the United States government are addicted to debt. It is our debts that are the root cause of our worsening economic problems, AND INCREASING OUR DEBT IS ONLY GOING TO MAKE MATTERS WORSE.
Alongside Leviticus 25, the first chapter of Ecclesiastes also points out the pervasiveness of what can be called cycles, or more accurately recurring themes, in the natural world:
One generation passeth away, and another generation cometh: but the earth abideth for ever.The sun also ariseth, and the sun goeth down, and hasteth to his place where he arose.
The wind goeth toward the south, and turneth about unto the north; it whirleth about continually, and the wind returneth again according to his circuits.
All the rivers run into the sea; yet the sea is not full; unto the place from whence the rivers come, thither they return again.
The politicians, leaders in business and finance, and the American people have just begun a lesson — courtesy of “the school of hard knocks” — in the mathematical accuracy of the Word of God regarding the biblical Jubilee. The mathematics behind the cycles of expansion and contraction that govern human economies can no more be resisted by mere human beings than the hydrological cycle, the cycles of climate and weather, the orbiting of the earth, or the passing of the generations.
At this point credit markets are headed for what is called a parabolic blow off or a blow off top, which will be accompanied by long-term damage to our economy, from which it will take decades for the United States and the world to recover. The question is not “if” the blow off is going to happen, only when. Probably sooner rather than later, but either way as Mr. Denninger likes to point out, “The math is never wrong.”