Insanity: Doing The Same Thing That Failed

… but expecting a different result.

The policy wonks have all been out the last couple of weeks extolling the “virtue” of the need to “stimulate” the economy now, but have fiscal restraint later.

Of course “later” is defined as “when I leave office” and now is defined as “give the people more cake.”

This sort of neo-Keynesian claptrap is easy to swallow politically, since it panders to two things – the inevitability of fiscal tightening (but not now when the pain will be apparent) and the desire of people to vote for a living.  Unfortunately it is black-sharpie-marker religion, just as it has been over the years for many politicians and “captains of industry” who have professed piety in some form – yet then get caught diddling a Congressional page or ripping off little old ladies.

Keynes, may I remind everyone, called for stimulus spending during recessions but increased taxes, primary surplus and retiring the debt taken on during the last recession during booms.

The problem of course is that Keynes’ theories are never followed in the real world.  We had an alleged “boom” from 2003-2007, but taxes were not raised and deficits were not turned into surpluses.  Instead we deficit spent each and every year.

Never mind the empirical evidence from the last four years.  In 2007 I said that further “stimulus” would not work for one simple reason: The common man – the ultimate party who must spend in order for the economy to expand, had levered himself up to the point of exhaustion and thus was incapable of financing further economic expansion through borrowing.

This was no trivial amount of money either – at the height of the bubble just before it blew up in 2007 nearly one out of every three dollars in GDP was newly borrowed rather than being earned!

On a quarterly basis what we tried to do is evident right here:

There’s no way out of this box folks, except the hard way.  We have pretended that we can offshore our productive jobs to China and India, yet enjoy the fruits of the assembly of all those “things” here – without the productive jobs to produce the wealth necessary to buy them with.  We push paper instead of tools, skimming off bigger and bigger pieces of every transaction.  Banks squeal like stuck pigs when limits on their extortion are proposed as law, such as with the credit and debit card interchange fee rules that were being considered.

Through all of this we’re admonished that we must be “compassionate” for those “less fortunate.”

It is true that some percentage of people are truly less fortunate.  But that percentage is small.

Most of the “less fortunate” are in fact victims of serial financial abuse promulgated by banks and other financial institutions.  We call this “progress” but it is nothing of the sort; it is in fact serial financial rape and those practicing it laugh all the way to their tawdry homes in The Hamptons while we fight over political crap such as “Gay Marriage.”

Unfortunately for those who look down their noses at the rest of us they pushed things too far.  All the payday loans, subprime mortgages and confiscatory rates on credit cards did indeed entice people to believe they were “rich” when in fact they were only pretending, but mathematics doesn’t care if you’re rich or poor, honest or dishonest.  It just is.  2 + 2 will always equal 4, no matter how many times someone claims it’s 6.  The claim can be made all one desires but when the fourth orange is removed from the pile, there are no more – despite the belief that one can in fact consume two more oranges.

Thus we find ourselves in a policy corner.  Bernanke knows this, and despite his claim that we would not reproduce the Japanese experience he has found himself backed into exactly that box.


It’s rather simple: Rather than force those who had done imprudent things, whether they be individuals or big banks, to come clean and quite possibly go bankrupt, Bernanke, like the Japanese Central Bank, tried to play Volcker in letting the banks “earn their way out of the hole.”

Unfortunately for Ben it didn’t work this time, exactly as I predicted it wouldn’t.  Why not?  Because it couldn’t – the consumer, the ultimate party who would have to more than double his indebtedness in order to provide enough “skim” to get the banks back to even, is out of credit capacity both as a matter of being able to cover the payments and willingness to take them on.

Our financial system has become much like the vampires in Daybreakers. Realizing that biting people in the neck provides only one meal, the banks have “captured” the people instead.  But there’s a limit to the amount of blood you can suck out of a person in a day without killing them.  Originally it seems easy – just take a little bit and all will be well, turning the people into something that’s literally farmed.

But along the way you run into a major problem – people don’t reproduce well when under restraint like this.  More to the point they don’t produce productive citizens that can be harvested – they produce more leaches instead!

We have now reached the global point where these schemes and scams no longer are operative.  Italy is just the latest example.  They are passing a balanced budget amendment to their constitution, which is good.  But that will inevitably shrink GDP for a while.  In turn that means the banking system there has a problem in that new credit acceptance will crater – as it must.

Here in the United States we now have a “SuperCongress” that allegedly is going to draw up some $1.5 trillion in “cuts.”  They won’t.  First, they’re not “cuts” – they’re reductions in the rate of increase.  There are no cuts.  But more to the point there are simply too many people who effectively pay no federal taxes at all – through EITC and similar schemes they live federal tax free.  The argument that the rich must pay their “fair share” is both hollow and immaterial, since there are simply not enough rich to cover the deficit irrespective of the tax rate you assess. In fact, you could steal all their wealth (not income, wealth!) and you’d cover the deficit all right – for one year. But now, by doing that, you would have turned every rich man into a poor man, and then the next year comes.  With nothing left to tax, what do you do now?

The cold, hard truth is that we, along with the other western nations, have run into the wall of spending other people’s money.  Eventually the “other people” run out of money – or credit.  Unbacked credit emission is a scam – it is nothing more than promising to work tomorrow for that which you want to consume today.  When used for speculation or consumption it is a Ponzi scheme that must eventually collapse, as anyone who has the mental fortitude to spend 5 minutes with Excel can ascertain.

The simple fact of the matter, mathematically, is this:

No sector of the economy, nor the economy as a whole, can acquire debt at a faster rate of growth than productive output increases in the economy.  This is mathematically proved up in literal seconds and no amount of political or monetary manipulation can change the eventual outcome if this path is undertaken.

Those who claim otherwise are the ones with the burden of proof to show exactly how, in detail, one can avoid the inevitable outcome that the laws of mathematics demand.

What’s even worse is that for each day that this practice continues the amount of damage that the economy must absorb to return to balance increases.  This too is a mathematical fact and cannot be avoided.  Only by growing debt slower than productive output, or in the case of output shrinking causing outstanding debt to shrink faster, can stability be regained!

Those on the other side of this argument – which happens to comprise a whole lot of people – must be challenged to show their work and explain how basic mathematical relationships that everyone learns in their first algebra class – when the power function is introduced – can be avoided.

The entire point of the book Leverage, due out in November (and which you can pre-order now), is that it should never have had to be written.  Every person who has passed basic algebra has the tools to understand what is going on in our economy and has been for decades – and how it must end.  Computer spreadsheet and graphic programs such as Excel make understanding the outcome easier, but they’re not necessary.  Back when I was in junior high and high school we plotted functions using graph paper; we didn’t have computers, as at the time the TRS-80 Model I had just been introduced in my 9th grade year.

That the 300-odd million people in the United States, and several-billion worldwide, fail to grasp the outright fraud put forward by a handful of people parading around PhDs while at the same time willfully ignoring basic mathematical functions that they cannot avoid is ridiculous.  That our schools have failed to teach our youth how these basic mathematical functions apply to every day life and the economy is an outrage – that is an intentional act of malfeasance for which each and every one of those instructors, Principals and board members should literally be thrown into the gulag with the key tossed down the sewer.

There’s no wonder that these institutions and individuals fail to do this, of course.  The very existence of their pension and medical “insurance”, particularly in retirement, cannot be defended once these mathematical realities are understood by the public! It is therefore essential for them to be able to suck off their alleged “benefits” from you, the taxpaying public, that you not understand these basic mathematical relationships.  These “educators” are literally attempting to enslave your children and in a just world they would be brought up on felony abuse charges for doing so.

Likewise in the broader economy Medicare, for example, cannot continue to exist in its present form.  It is a scam.  The Medicare tax is 2.9% of wages.  Median family income as of 2008 (last year for which detail is available from US Census) was approximately $50,000.  This means the median family pays $1,450/year in Medicare tax, assuming all their income is taxable (of course this is not the case, but we’ll assume it is.)

Over a 45 year working life (20 – 65) the median family pays $65,250 in Medicare tax.

The median family contains, today, about 1.5 working people (many families are single-earner – either one adult with kids, or an adult alone.)  We’ll be kind and assume that the median family contains just one working adult – that is, no married households at all.

Here’s the problem: The average person will consume approximately $300,000 in Medicare-reimbursed medical expenses during the time period from retirement to death.

Would you care to explain how you can pay $65,000 for something (in reality, more like $40,000 on average over your working life since there are many married households) but have each person (not household) collect $300,000 from that same program and not have it blow up?

When you hear people like Steve Southerland (and others) say that “Nobody 55 and over should have their Medicare touched” you’re hearing a man or woman who refuses to face the mathematical facts – retirees are taking some five times as much out in benefits as they paid in.

These same sorts of mathematical relationships exist throughout our financial system.  None of them are sustainable.  The simple fact of the matter is that debt cannot be used to finance consumption or speculation on a sustainable forward basis.  Mathematically debt must grow slower than productive output does or the economic system in question is destined to collapse.

We can argue over the “when” all we want, but so long as this relationship holds we are not arguing over the outcome – only the timing is subject to debate.

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