What do 1637, 1873, 1929, 2000 and 2007 have in common? Why has our economy refused to recover after the 2007 housing market implosion? Is there some sort of simple solution, or even a means of protecting oneself from the ongoing stress in the labor and financial markets when your neighbor loses half the value in his 401k and you receive a pink slip with your paycheck?
Throughout history it is the serial and intentional abuse of financial markets and the unholy alliances that are formed between banking and governments that lead to the worst economic catastrophes.
“Irrational exuberance” is often given the blame, but intentional distortion of factual information, such as the credit quality of a borrower, is not “irrational” — it is an active deception undertaken for profit.
Governments are driven by the same sort of mentality as are private businesses when it comes to willful blindness or outright false statements of fact. It is very convenient for a government to borrow and spend just a few more dollars than they manage to tax from their citizens, satiating their demand for services of all sorts, just as it is convenient for a household to borrow against alleged home equity so as to be able to live a lifestyle that is unsupported by its earnings power. Financial deceptions tend to start small and are justified as being temporary or trivial, especially when they support the holy grail of all economies — growth.
But arithmetic does not care about politics or the personal ethics of politicians, businesspeople or homeowners. The fundamental nature of compounding is often cited as the “most powerful factor working in your favor” when you save and invest, yet that same nature makes fiscal deficits, no matter where they exist, a dangerous drug that addicts with its siren song and then bites back with vicious yet unavoidable consequence.
“Throughout history it is the serial and intentional abuse of financial markets and the unholy alliances that are formed between banking and governments that lead to the worst economic catastrophes.”
Karl Denninger Author, “Leverage”
America has a 30 year record of addiction in this regard. From 1980 until the collapse in 2008 there was not one three month period where growth in GDP exceeded that in total systemic debt. We thus generated alleged growth in our economy that was factually false over a 30 year period and built into our economy false signals of demand. The mathematical laws governing exponential growth made certain the outcome of 2007, where we reached more than 6 dollars of additional debt for each dollar of added GDP, just before the subprime crisis led to the near-collapse of our banking and financial systems. Unfortunately rather than both allowing those who made imprudent bets to fail while holding the people who intentionally misled to account we bailed out the institutions that knowingly took dangerous bets under the rubric of systemic risk but left the market to ravage the common American.
“Leverage” is about these abuses and their impact on real people. It chronicles the abuse of debt financing and fiscal deficits while demonstrating the fundamental mathematical relationships that underlie all financial systems and cannot be avoided.
You can read dozens of books on the 2008 collapse and the incestuous interconnectivity between big business, finance and the political system, but most remain within their narrative focusing on the bad actors or try to provide a guide for personal protection of one’s assets from what appears to be certain economic calamity to come.
“Leverage”, however, spends half of its easily-understood pages in a different endeavor: Real solutions in the political and policy space that, while unable to prevent what is mathematically inevitable, will soften the blow while realigning our nation to restore the rule of law, render banking safe and sound into the indefinite future, address our unsustainable entitlement promises, return both capital and manufacturing to our nation and provide the underlying and necessary energy resources that America needs for a vibrant economy.
Karl Denninger founded The Market Ticker®, a blog dedicated to uncovering market mischievousness. He is also a columnist on SeekingAlpha.com and has appeared on MSNBC, CNBC, and is a frequent guest on WBAL talk radio in Baltimore. He produces a weekly Internet radio segment on BlogTalkRadio with real-time call-ins from listeners and occasional invited guests. Karl is also one of the original founders of the Tea Party movement, and, along with FedUpUSA, launched the first financial protests related to the bailout of banking institutions after the failure and forced takeover of Bear Stearns. Previously, he was CEO of Macro Computer Solutions, and is a self-made
entrepreneur and millionaire.