And Now, The Consequences

Wile E Coyote Gravity Lessons

It’s anecdotal thus far, but I don’t believe it will remain that way for long.

I am getting repeated reports of large layoff actions, both pending and immediate.  Some of these appear to be focused on the impact of Obamacare, some are small businesspeople who are simply quitting and closing up shop due to expected higher tax rates on a forward basis, and some are firms that were hanging on by the skin of their teeth that giving up the ghost.

Many of these folks appear to have held out a “last and final” hope that the Republicans would win and somehow change the dynamic.  This was a foolish premise — indeed, foolish beyond words, as the Republicans are the party of funny money just as are the Democrats.

The game of funny money has reached its terminus.

There are a number of commentators who have said that based on this model in the market or that Bernanke should be running QE at a rate that is “$X”, where the rate he’s running today is “$X – Y” (that is, much smaller.)  They’re missing something important — Bernanke is many things, including being an ideologue and self-deluded, but one thing he’s not is stupid.

The fact of the matter is that he knows full well that he has become the crutch upon which the US House and Senate can and have relied to evade their responsibility to produce any budget at all — say much less a balanced one.

There are limits to monetary policy and all actions have reactions.  Bernanke has not appeared to care, but remember that one of the most-powerful tools any central bank has is the jawbone and the appearance of both omniscience and omnipotence.

In truth central banks, like all humans and human institutions, possess neither attribute.

What Bernanke has not done, but could and should have, is demand that the fraudulent leverage come out of the system.  But he has not done that, and a big part of the reason why is that there is no support for it in the Congress. Incidents like Rochdale, which apparently put on a $700 million position in Apple stock with somewhere around $3 million in actual capital point to the intentional lack of risk controls up and down the line.

There will always be people who will either evade limits prospectively or do so willingly with the support of management on the sly, expecting to make a killing but prepared to call it a “rogue trade” if things go wrong.  The purpose of orderly market regulation is to prevent this by imposing margin requirements and thus forcing all market participants irrespective of their size and reputation to prove the ability to clear each and every trade before it is exposed to the market.

You and I are subject to these limits every single day when we trade in our accounts.

It is now clear that this lesson of 2008, which I repeatedly wrote on and in fact faxed copies of to every single Representative and Senator, was intentionally ignored.

This morning the market is continuing to sell off and the FX — foreign exchange — is the ugliest I’ve seen in months.  There are many who think this is simply a reaction to the election and the US “fiscal cliff.”

They’re wrong.

The entire world has played the same game — allow “market participants” (big banks and other connected financial institutions) to cheat.  It wasn’t enough that we walked right over the cliff in 2008 due to massive, pervasive and outrageous levels of cheating — fraud up and down the line.

That didn’t lead to a single bankster going to jail and it didn’t change one thing about how our financial institutions are structured, here or anywhere else.

Greece, which many people think is a “no big deal” sort of sideshow, is anything but.  The fact of the matter is that Greece runs out of money in about a week.  There will be no more money for them, as the limits of doing so without openly and blatantly violating not only publicly-taken positions but legal restrictions have been reached.  This cannot be done in secret any more, and that makes for an intractable problem, because now any such “forbearance” has to be donein the open.

CNBC this morning is talking about the “Fiscal Cliff” as if there’s some sort of solution that does not involve admission of the frauds of the last four years at a fiscal and monetary level; a cessation of the claims that we can have “Economic Growth” that is literally all the result of credit creation in excess of production, and recognition of the embedded damage that has been done to the economy.

They’re wrong.

Everyone who has made this claim is wrong.

They’re wrong because 2 + 2 = 4, no matter what else you want to claim it is.  It will never be other than 4.  There are people in the Libertarian Party who tried to tell me that they simply didn’t believe that these chickens would come home to roost and that “the can will be kicked forever.”  This is the same polemic that I hear over and over again every day in the mainstream media, or alternatively, that there is some “glide path” to resolution of the problem.

They’re wrong.

I left the Libertarian Party formally at all levels — County, State and National — yesterday.  I did so because they ran their experiment this election cycle and now with the results in they refused to admit they were wrong.  They ran a political approach that was focused on sideshows rather than the fact that arithmetic dictates what you can and cannot do, and that the economy was and is on the precipice of a full-on meltdown, along with the Federal and State governments.  I refuse to place effort into a political group that wants to stick its head up its own ass, no matter what label it has.

I tried to move the conversation in that party and generate consensus on this point and failed.  I admit my failure to persuade but I refuse to tilt at windmills.  I am not Don Quixote and I do not fit Einstein’s definition of insanity.  My efforts, my resources and my willingness to place both into the field of play are both finite and are and will be constrained to productive use.

I want to bring this graph back, one of the first in my book Leverage, because it is the root of all that is going on.

This represents a rough approximation of our economy and debt over the last 50 years.  The “spread” between debt and growth has been about 3% during that entire time, up until the last couple of years.  Notice that the green line accelerates away from the red one.  The green line is total debt and the red line is economic output — the ability to pay across everything in the economy.  While it appears your economy is growing, it really is not — you are purchasing every dollar of that output with an ever-greater level of indebtedness and the acceleration is unrelenting.

What must be understood is that the above graph is not some invention.  It is a simple mathematical relationship; two exponential functions graphed over time (the blue line is interest on the green at 6%, and what happens to that — the inevitable intersection of it with the red, thus your guaranteed insolvency — happens at about year 100.)  You can reproduce this graph in Excel in a couple of minutes or you can use a calculator and a piece of graph paper.

This result will happen each and every time you allow debt to expand faster than production, without exception, as the outcome is defined by the laws of mathematics.

There isn’t another graph that looks kinda like this, is there?  Oh wait….

This is not about politics, it’s about arithmetic.

Now consider folks what happens when we can’t buy forward economic output with ever-increasing amounts of debt?

The economy collapses back to its sustainable size.  The government is forced to collapse itself back to its sustainable size.  Government will kick, scream and shove, and so will the so-called “entitled”, but it doesn’t matter; arithmetic doesn’t care about politics nor shouting.  It just is.

And by the way, from 2010 forward debt is no longer expanding; the total systemic debt change upward from 1Q 2010 to today, including the furious rate of new federal debt, is +0.9%.

The pattern from 1953 until 2010 has now been violated; we went off the Wile-E-Coyote cliff and have been furiously pedaling our legs in the air wondering why we’re not moving forward any more — but have yet to look down.

It’s a long way down.

In 2000 we had to accept about a 10% contraction in the size of government to restore balance after the tech bubble.  In 2007, after we played “kick the can” with a housing bubble, we had to accept about a 20% contraction.  In 2007 and 2008 when I wrote to Congress and started The Ticker, I pointed out that were this cycle to be extended by more games the expected contraction that would be built into the government would be forty percent and the expected time before this outcome became emergent and blew up in our face was, based on the previous cycle times, about four years.

I wasn’t right, and the market is not taking a header, because I’m the smartest guy in the room.

I was and am right because arithemetic is not comprised of suggestions, it is comprised of laws that cannot be violated.  Each and every time you cheat, no matter who is doing the cheating or for what purpose, you are simply compounding damage into the economy and markets that must eventually be recognized in some form or fashion.  It cannot be otherwise because it is impossible for any other outcome to occur in a world where none of us are God and thus we cannot wave our hand or give a nod and violate the laws of mathematics and physics.

Time’s up.

Discussion (registration required to post)