By Karl Denninger
That is, with all my pesky math and charts like this:
Remember that I’ve been preaching for a while that we embedded a roughly $500-600 billion structural deficit into the economy post-2000? And that now, in response to this recession (and in a refusal to admit that we have been playing credit drunk) we’ve now embedded a roughly 10% structural deficit – three times the former?
Before you consider me a chucklehead for having the temerity to look at the math you might take it up with the BIS – the Bank of International Settlements, or the “bankers’ bank” – which agrees with me:
According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010.
Gee, you mean they looked at the same chart I’ve been preaching from?
This stuff isn’t hard folks!
Now Einhorn of Greenlight Capital, a rather-well-known hedge fund manager, is sounding off. He said:
A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs.
This is exactly what I’ve been saying now since this mess began and the “response” became clear: Government didn’t “stimulate”, it instead built in structural deficits – just as it did in 2003.
But you can read David’s missive any time you’d like, or the BIS’.
The key question is why would the government take such a step?
Some would claim that it was about trying to exert more control over the economy, as of there is some sort of grand conspiracy extant to take every piece of control you have over your life and transfer it to government.
I’m a bit more realistic in my assessment – and less conspiratorial.
Government did this because it was the only way to avoid having to admit that we have too much debt in the system and thus that the economy must undergo the adjustment necessary to bring private final demand and production into balance.
That’s fancy economic-speak for “you can’t spend more than you make forever, and when you stop, paying down the debt you accumulated will make it hurt more than if you never did the bad things in the first place.”
But government was the one that encouraged all the “bad things.” Claims of “home ownership for all” and willful blindness while builders, lenders and Real Estate “professionals” all pumped housing prices to the moon – irrespective of whether the only way you could “buy” such a thing was with a fraudulent mortgage.
In the previous cycle, the marketing and sale of stock in hundreds of companies that never had a chance of turning a profit, being in fact nothing more than a sophisticated and outrageous “pump and dump” scheme with you as the bagholder.
In both cycles people were promised “the best medical science can produce” without concern over ability to pay – either individually or collectively. We can’t actually provide $1 million in medical care to every person in the nation (such an attempt would generate 3.3 x 1014 in cost at our current population; that’s 3 followed by 14 zeros, or 330,000,000,000,000 in expense over a lifetime, which is roughly 30% of the entire nation’s GDP on an annualized basis), but in point of fact you can easily run up that sort of bill in the last year of your life – and if you don’t have to demonstrate ability to pay, many people will do exactly that. We currently spend about 16% of GDP on health care; the “unrestrained demand” level is about twice that, while the actual amount we can afford is roughly 10% of GDP.
Our expectations and demands with regard to health care are three times sustainable consumption – just as is in housing, where we believe we “deserve” a 3,000 square foot house for a married couple, where the actual level of sustainable demand and consumption is about 1/3rd of that.
In a couple of weeks we’ll be able to reprise one of my other favorite charts, the total debt load in the system, as the new Fed Z1 will be released. Here’s the previous chart:
All we’ve done is pulled forward future demand with more and more debt, and having reached the endpoint of this game where rates start to ramp precipitously (and having seen it happen in both Iceland and Greece) we can no longer play “a dollop of debt and a smile” with our own fiscal profligacy.
Obama and the rest of the merry band of clowns in Washington DC believe that if they can just prop up the stock market “consumer confidence” will return and people will “feel rich.” But feeling wealthy and being wealthy are two different things. You may feel wealthy if you have a nice house, a nice car and a nice boat but you aren’t in fact wealthy unless you have all of those things, plus enough capital to live off for the rest of your life, without any responsibility to pay anyone else on a continual compound forward basis – that is, unless you are without debt.
If we deal with the facts the stock market will decline precipitously, as profits are very sensitive to revenues, which will decline as production comes in line with actual final private demand. Standards of living will decline too – significantly so. The 3,000 square foot house for the “middle class” and the idea that one can consume $1 million or more of health care without the ability to pay for it will both disappear.
If we don’t deal with the facts then the stock market will crash, and the austerity we will face will be far worse. Instead of housing prices reflecting 2-3x annual incomes and the average family of four living in a 1,500 square foot house they will be lucky to live under an overpass. Half the S&P 500 will be rendered bankrupt by ever-increasing demands for more taxation, which they will try to pass on to consumers – who have no money. Medical care will be available – with a one year waiting list for critical procedures, rationing by the most-obvious method – you’ll die before your turn comes up. In the extreme case there could even be a breakdown of critical transportation and food infrastructure in the United States.
I want to be bullish on the future of the nation, but until and unless we get the spending under control, which means telling people what the truth is – not necessarily what they want to hear, along with taking the medicine we have avoided for the last two decades – it simply isn’t in the cards.