Posted by Karl Denninger
The Euro Zone is in serious trouble, and Britain and we are next.
The game’s up folks.
Many people talk about us “printing” money. Indeed, there’s a large brokerage that runs advertisements on CNBS with that exact claim, over and over and over. Ron Paul and Peter Schiff have run this mantra for years.
This chart says something else entirely:
THERE HAS BEEN NO PRINTING GOING ON!
No, what’s been happening is worse.
Worldwide governments have borrowed and spent huge percentages of their GDP in a puerile attempt to protect a criminal class that has looted the public and bribed the legislature – THE BANKS.
There was always a point where this would fail, but it is flatly impossible for anyone to know exactly where it was beforehand.
But mathematically, there was a point where it would fail.
The gamble that Bernanke, Trichet, Obama, Bush, Paulson, Geithner and everyone else in the world took is that we could do this for a short period of time and that in doing so private demand would pick up and return us to “stability.”
THESE PEOPLE DID NOT STUDY THE ABOVE CHART, AND THEY’RE F^#KING IDIOTS FOR BELIEVING THAT WHICH WAS TRIED IN 2003-2007, WITH A HIGHER DEBT LOAD THAN WE HAD THEN, WOULD WORK NOW WHEN IT FAILED IN 2003.
O’Neill was on Bloomberg the other day. He was Bush’s Treasury Secretary during part of his first term, until he resigned under pressure from the administration. Why did he resign in 2002?
BECAUSE HE KNEW THAT WHAT THE BUSH ADMINISTRATION WAS DOING WOULD NOT WORK.
A study he ran in 2002 showed that the United States would be running budget deficits of more than $500 billion going forward, and that to fix it we would have to enact an across-the-board tax increase of more than 60% or radically cut entitlement spending.
We did neither, of course, and Bush pushed through a huge entitlement increase in an attempt to appease Democrats. It did, but it also created a structural $500 billion budget deficit that we couldn’t get rid of.
The remaining years of the “boom” from 2003-2007 were all fueled by fraud. Unable to generate positive GDP through organic growth and productivity we instead imported 20 million illegal Mexicans (who our current President refuses to send home and seal the border against, even though Calderon, who wants us to legalize them all, arrests and deports more illegal immigrants a year from Mexico than we catch!) and blew a huge housing bubble, giving anyone with a pulse a loan to buy a house irrespective of their ability to pay.
These weren’t even mortgages – they were virtually all balloon notes that were never intended to be paid, but instead designed and intended to force the “buyer” to come back in 2 or 3 years and refinance, so the banks could skim off yet another set of fees for themselves and steal any equity that the hapless owner had accumulated. If there was excess “equity” the banks graciously let you have some of it during that refinance to buy a boat (with equity that didn’t really exist, but for which you’d be obligated in the future.)
Three years ago I said we couldn’t get away with the intervention. Those who have been reading The Ticker since the beginning know that I have written several open letters, have faxed tens of thousands of pages to Congress, and have offered to get in a car or on a plane and come testify – under oath – as to the mathematical certainty of what we face and what we must do.
You also know that nobody wants to hear it and no such invitation has been forthcoming, that I was basically laughed off CNBS and that the “rah rah” crowd all got millions of Americans to pile back into the stock market.
Folks, it’s quite simple. Accumulation of debt is inflationary. It pulls forward demand from tomorrow. Look at house prices from 2003-2007 for your best and finest example – they quadrupled in some areas and doubled in many more. 20%+ “appreciation” annually was common.
But when you take on debt to buy something you’re buying today what you would otherwise consume tomorrow. This is the Wimpy action: “I will gladly pay you Tuesday for a hamburger today.”
But when Tuesday comes, you’ve already eaten the hamburger, you’re hungry again, and if you pay the hamburger stand owner you now have no money with which to buy another hamburger.
When debt loads rise to the point that you can no longer buy both today’s hamburger and pay for the one you ate last week the impact is deflationary, because today’s demand, having been pulled forward from yesterday, can no longer be sustained. Without demand sales collapse and without sales there is no profit – and no employment.
Keynesian economic thought is fundamentally bankrupt, as it requires that treasuries be rebuilt during flush times so you can spend the money during bad times. Keynesian economics does not include, and never did, borrowing to spend. That’s a corruption of Keynes beliefs but it is where attempting to apply Keynes economic “theories” to the real world always ends up, as government will always find a place to blow a surplus, thereby guaranteeing there won’t be one to spend when the bad times come.
As such the best we can do is allow business cycle downturns to work themselves out. Yes, this process will suck. Yes, people will lose their jobs. Yes, people will go bankrupt. But we must never, ever backstop businesses – including banks. We can (and should) backstop depositors (people) through a self-funded insurance fund (which is what the FDIC is supposed to be, and would be if run correctly) but even there we can’t make people 100% whole, as it drives them to “reach for yield” and thus chase insolvent institutions. Changing the FDIC to pay 80% of insured deposits (instead of 100%) would be sufficient to both prevent people from being bankrupted but also stop the “chase for yield” that winds up supporting those who have already gone bust.
I remain willing and able to get on that plane or in that car and come testify before any body of Congress, under oath, or lay it all out on any form of broadcast media.
But Congress doesn’t want to hear it, and “Tout TV” sure as hell doesn’t want to broadcast it – especially not the above chart and what it means, even though that, properly explained, makes everything crystal-clear – and irrefutably so.
It sucks to have to say “See, I told you so!”, because we had an opportunity to flush these banksters down the toilet in 2007 and 2008, and failed to take it. Yes, we would have had to recognize the Depression we are in right now, but by now it would be over and employment would be truly recovering. We would have been forced to put in place something like The Fair Tax to keep our government from imploding and that would have brought 70% or more of all the multinational corporations to our shores over the intervening couple of years, stabilizing our economy. We would have broken the back of the bankster cartel, jailed a bunch of ’em and made damn sure it could not happen again by re-imposing Glass-Steagall. Those who were not jailed would have fled to other nations, waving their fingers at us at how “those countries” would be better off. Then they would have flushed in their excessive debt loads while we, in America, would have taken our medicine already.
Yes, all this would have been at the rest of the world’s expense – that’s what happens when you do it right and everyone else does it wrong.
But we didn’t choose to do that. We still can do the right thing, by the way, but now the damage is greater, because you can’t unbreak an egg. The $3 trillion+ that we borrowed and spent is gone.
Our options remain as they were in 2007. We can take our medicine and accept the damage that has already been done yet papered over and shoveled under the carpet or we can continue to lie and pray that we don’t end up like Greece.
But prayer doesn’t work when you’re asking God to intervene against a mathematical reality that you created by your own hand, and thus what’s coming – and you’re asking for the divine to stop – is something you deserve.