If you have been following The Market Ticker since 2007, or even just for the last couple of years, you’ve heard the following sermon points time and time again.
- We’ve cheated on “economic growth” for 30 years. It has been fake. All of it. The below graph has been printed dozens of times as it has been updated over the last five years, but you need to look at this and drill it into your head, because it represents the depravity of what we’ve all participated in and done.
- The “excess debt” taken on in the economy since 1980, beyond growth including the contraction of the crash in 2008-09, sums to $37 trillion in the United States alone. That is the amount of the adjustment required to restore economic balance and sums to more than twice GDP. That’s the area “under the curve” in the above graph. To put this in perspective this is somewhere around three times the market cap of US stocks and worse, far more than half of the entire net worth of everyone in the United States and more than twice the net worth of every non-financial corporation in the nation. That’s what’s exposed to loss to simply restore balance, assuming no overshoot.
- Spain now claims to be “locked out of the market” at a 6% 10 year bond yield. Let this sink in for a minute. It was not long ago that a 6% bond yield was considered reasonable. This ought to tell you exactly where everyone in the Eurozone is — they cannot afford the interest payments if and when the bond market normalizes. Consider that a 6% mortgage was considered incredibly good just a few years ago but Spain cannot afford to pay that rate on their borrowing.
- There is no way to solve the above problems with more borrowing, as that simply drives up the total interest that must be paid and thus drives down the rate that one can afford. This in turn means that until budgets are balanced and in fact run at least small actual surpluses there is no solution that can work! Yet nobody — not here, not in Europe, nobody — is talking about this as the solution to the problem and demanding that it occur. They’re not doing it in Greece, they’re not doing it in Spain and we’re not doing it here in the United States.
- In the wake of the 2008/09 crash which laid bare that European banks were running around 50:1 leverage and our banks were running at 30:1 or more, no reforms have been enacted to (1) stop the counterfeiting that led to the expansion of debt in the above chart, (2) isolate those institutions with material amounts of leverage so that when they fail they do not cause systemic collapse. Instead we made balance sheet lies legal in the early months of 2009 when Congress put a gun to FASB’s head and told them to either allow “mark to fantasy” or Congress would legislate. This marked the bottom in the stock market — almost to the day. But it was and is a scam, as claiming that a box of dog turds has value doesn’t change them from dog turds into edible morsels.
- We refused to take the leverage down in the United States because it would expose the fact that all the major financial institutions in the United States were and are insolvent. Worse, so is every pension fund and all the insurance companies that wrote annuities and other “guaranteed” payment contracts — and that’s almost all of them. This is the real 900lb Gorilla in the room — it’s not mortgages per-se and homeowners it’s who owns the payment streams.
So let’s lay out the expectations.
We must first recognize that until we hear politicians discuss openly and begin to sell to their respective populations the need for an actual balanced budget including the economic adjustment and difficulty that is arithmetically certain when that adjustment is taken there is no hope of an actual productive and positive outcome.
That is, since GDP = C (consumption) + I (net investment) + G (government spending) + (x – i) [net exports] contraction of deficit spending must either decrease “G”, “C” or “I”, depending only on whether you achieve it by raising taxes or cutting spending.
In the United States here’s the bad news:
This graph tells the tale: last calendar year the Federal Government added $1.225 trillion in debt, or 8% of GDP. Ceasing deficit spending will result in more than an 8% contraction since there is a “pass-through” effect and thus a multiplier. Economists argue over exactly what that number is but if we (conservatively) assume around 1.2 is correct then an instant contraction of 10% in GDP will occur in the United States.
The rest of the world faces similar — or even worse — outcomes. This in turn will expose the fact that much of that more than $30 trillion in US “asset valuations” supported by the excessive debt is in fact false; there is in fact no value. That in turn will force revaluation of these assets and the payment streams assumed to come off them.
- Every private and public pension plan must be revalued to current and reasonable cash flows. That’s not 8%, it’s 3% at best. Reaching for that 8% marker requires ridiculous risk (e.g. risky stocks and similar alternative investments) which in turn means the risk of losing half or more appears. The difference between an 8% assumed compound return rate and a 3% one over 30 years is massive — this is an approximately 75% loss of expected cash flow!
- The short-term economic activity adjustment will be extreme, more than double the GDP damage done in the 2008/09 recession. There is no way to avoid this and we must accept it. If we don’t we are risking an all-on collapse, as the positive feedback at some point reaches a critical level where government funding collapse occurs. Nobody knows exactly where that line is and those who claim they do are lying.
- In the United States where mitigating factors can be undertaken to soften the blow to the consumer of these changesthey must be done. This is also true in Europe but the particular challenges in each economy are different and what we can do here they probably can’t do there, and vice-versa. In particular in The United States we must deal with the medical system cost-shifting and cost-escalation through a complete and immediate removal of the legal protections that protect what amount to both uneconomic treatments and gouging. Since military spending is a big part of our problem we must also deal with the energy access that our military spending protects. And since a trained workforce is essential we must also remove the artificial barriers (such as bankruptcy preference) from educational loans and allow the cost of education to collapse back to sustainable levels.
- We must challenge and refute the claim that “deflation” is to be avoided at all costs. That claim is a lie. The truth is that we’ve had ridiculous inflation to the tune of nearly $37 trillion over the last 30 years, more than a trillion a year, that has gone into asset prices of all sorts and to a lesser degree into consumer prices. The removal of this inflation is not deflation, it is in fact nothing more than the removal of an artificial and fraudulent debasement of the currency and valuation thereof. We must insist that politicians draw this distinction, explain and sell it to the electorate, because the alternative is that we lose the ability to exert any sort of control over the unwind at all resulting in an economic collapse.
- We must put in place “One Dollar of Capital” and absolutely bar banks from gambling with depositor funds or debasing the national currency. There is nothing wrong with competing currencies — what amount to “bank scrip” — but such must be explicitly unprotected. We have this now in a few places (e.g. “Disney Bucks”) and there’s nothing wrong with allowing it everywhere via the removal of “legal tender” laws; if you wish to contract a debt in oranges who am I to tell you otherwise? But this is immaterial to the instant case of the national currency; whatever government denominates taxes in will become the defacto currency of the nation, and we must not permit private firms to debase that currency, creating inflation via exponential pyramid schemes that must always eventually collapse. This is active fraud and must be prohibited and those who attempt it punished exactly as I would be if I ran off $100 bills on my office copier.
In the meanwhile you should have, by now, completed the previous “Ten Things” Ticker list, because the fact of the matter is that it is a near-certainty that you and your neighbors will not get off your asses and demand that the politicians do the right thing.
And if we don’t there is a high probability that before the end of the year something will break over in Europe. In fact it is a near-certainty, as the people there are just as unwilling to stand and demand that their politicians do the right thing as we are here.
If you haven’t completed that list — especially including getting out of debt and having a solid reserve of at least six months of living expenses (and 12-24 months is better) — it may well be too late.