Deficits, Bernanke & Failure


Heh, Someone Gets It (Buiter)

Posted by Karl Denninger

Hattip Zerohedge:  (The original article is here)

Note the structural deficit number.  This is what happens when you allow this to go on for a decade:

Which in turn leads to this:

That red line is actual private demand expressed as the delta (or change) in GDP.

I don’t have accurate debt and GDP numbers on a contemporary basis for the rest of the nations that Buiter cites, and besides, I focus on the United States anyway.

Buiter posits that The Fed could eventually be “forced” to monetize – that is, try to inflate it away.

This is where Buiter and I part company, because it is impossible to inflate out of a mess like this when you have social spending indexed to inflation – and our entitlement programs all are in one form or another, with the most-ridiculous, Medicare, rising at much higher rates than general inflation.

As such attempting to “inflate out” won’t work – it will instead result in Weimar-style hyperinflation which, as it did in Weimer, will inevitably result in political and economic collapse.

Note that Bernanke has said “we cannot grow out of this“; he has (belatedly, but surprisingly) finally “gotten it.”

It would have been nice if he “got it” three years ago, of course.  It might have altered his view on bailing out people and providing artificial support instead of demanding ab-initio not only the legal ability but the legislative mandate to close all of the so-called “too big to fails” and use the funds we have blown to pay off depositors instead.

Yes, that would have resulted in a Depression being “recognized.” 

But we’re in one now, as the above chart shows conclusively, and we have in fact been in one for two years.  There is no evidence we’re going to get out of it either – the only way that can happen is if private final demand replaces the government borrow-and-spend, and for that to happen deficit spending must decline while GDP continues to advance.

When you’re borrowing from $115 to $333 billion a month and pumping it into the economy – that is, from roughly 9% to 30% of GDP – there’s zero evidence that this can or will occur, and in fact despite all the market and media crooners claiming “it’s getting better” the mathematical facts say exactly the opposite – it is in fact getting worse, as government replacement of private final demand with borrowed money is going up, not down.

That recognition of the math is starting to seep into the consciousness of economic analysts at major international banks is an important signpost. 

The next one will be when recognition of the same math starts to poke through the mainstream media – despite strident claims otherwise from Geithner and others. 

Once that second signpost is reached there will no longer be time or opportunity for government to proactively respond.  The market will, at that point, take final and irrevocable control.

If Obama has any intelligence at all he will fire Summers and Geithner immediately and in doing so stick them with responsibility for refusal to deal with the truth, close or break up the too-big-to-fails (via executive order if he can’t get a bill passed immediately – yes, I know that will raise howls of protest but this truly is a national emergency!) and demand reimposition of Glass-Steagall and mark-to-market – right here, right now, forevermore.

The tough choices are never popular, but mathematics doesn’t care about popularity, and as recognition is now seeping into the “mainstream economists” employed by major multinational financial institutions it is simply a matter of time before they ENFORCE austerity and withdraw their support for the markets if it is not forthcoming.

All I can say is “see, I told you so!