‘The US politicians from both parties have promoted the debt leverage as a means of buying votes.‘ – Denninger
In an exclusive interview with the Voice of Russia, Karl Denninger talks about the sustanability of America’s debt burden, the future of Medicare and why the Keynisian economics practiced today is a fraud. Karl Denninger is an American businessman, financial pundit, political activist, publisher of The Market Ticker and the author of Leverage: How Cheap Money Will Destroy the World.
Reality Check: Is the debt burden of America sustainable? For how long can the US continue to finance its spending by borrowing without changing its spending habits?
Karl Denninger: No, it is not sustainable. But what has to be understood is that most of the “growth” we have seen since the 1950s has been financed. That is, we have continually increased debt faster than GDP somewhere in the economy. The shift over the last decade occurred as the private sector became debt-saturated. We are now trying to maintain the impossible, and it will end very badly if we do not reform our ways.
Mathematically we have less than a decade left of this. The market, however, never waits as long as the mathematics says it can. Exactly when the market decides it’s had enough is impossible to determine in advance, but it appears from all indications that during this Presidential term we will exhaust the patience of the markets with regard to how we currently spend at a government level.
RC: In regard to real economic issues, is there a notable difference between the Democrats and the Republicans? If yes: what is it? If no: why does it happen, aren’t the two parties supposed to be different?
KD: Not really. The primary problem is the above — we have a “private sector” that has become addicted to using debt leverage as a means of having that which cannot be paid for through economic surplus (what one earns less what one has to spend to remain alive in food, shelter, energy and similar.) Rather than be up front with the American People, the politicians from both parties have instead promoted the pyramiding of debt leverage themselves as a means of buying votes.
The problem we have in terms of fiscal sustainability stems from the medical system; costs have risen at about 9% annually since 1980. This is due to the embedding of special protections for this industry up and down the line; such a “growth rate” in expense would never be possible otherwise. Like all Ponzi Schemes this appears to be perfectly ok when it begins and yet in later years it is disastrous. We’re now running into the “disastrous” phase; neither party will take on this industry, likely due to lobbying influences.
RC: According to the mainstream economists, if a country borrows money and stimulates consumption, this consumption is supposed to start a “virtuous cycle of growth” that is supposed to replace the “vicious cycle of deflation”. During the last several years we’ve seen multiple massive stimulus programs but a “virtuous cycle” is nowhere to be seen. Why? Where are the “green shoots”?
KD: This never works. Borrowing and stimulating consumption is at best a zero sum game and due to economic losses (no economy is perfectly efficient, just as no thermodynamic process is perfectly efficient) it is always a negative sum game in the long run. Due to productivity increases the normal economic condition is a mild deflation! This of course bothers those who peddle debt, as it makes the true cost of said debt apparent to the borrower. As such you get crackpot nonsense about how “deflation is bad” but “mild inflation is good.” The opposite is actually true.
The “virtuous cycle” from deficit spending never actually exists. Keynes talked about deficit spending to offset downturns but the other part of his prescription required running a surplus and constraining spending to less than tax revenues during booms, so as to fill the treasury with the money to spend! We never do the latter, of course. Keynesian economics as practiced today is a fraud.
RC: What is the future of Medicare, Medicaid and Obamacare? Can the government finance such programs forever?
KD: All three are done, and no, the government cannot finance these programs forever. Obamacare, from a cynic’s point of view, was intended to collapse the private medical system and lead to a fully-socialist single-payer system. The economic damage it will inflict in the process, however, will be terrifying — just proceeding straight-up to the outcome desired would have been preferred.
The Federal Government’s medical spending went from $53 billion in 1980 to $850 billion in 2011. This is approximately a 9% growth rate. The problem is that in 30 years this results in over $11 trillion in annual expense — for the Federal Government alone! That obviously won’t happen and yet nothing in Obamacare resolves this.
You cannot fix Medicare and Medicaid — you must instead address the underlying medical system. Neither political party has taken any steps to do so, but without doing so these two programs are doomed to either fail and be cut off or they will destroy the Federal Government.
RC: Why was there no successful third party candidate in the recent presidential elections? There seem to be a lot of issues which could have been used as “cornerstones” for a very successful campaign ran by a third party candidate.
KD: There appear to be no third parties that will run on a clean platform. I do not have a good explanation for this, other than the desire of Americans to seek celebrity in their politicians, including in the third parties.
RC: Sergey Glaziev, Vladimir Putin’s economic adviser, recently said that “unconstrained monetary emission is a form of legalized aggression” because it allows some countries to use their “printing presses” to acquire real assets and at the same time finance their own “pyramids of debt”. Do you agree with this view?
KD: Yes, for the most part. I have advocated a position called “One Dollar of Capital” that prevents this sort of abuse. However, it requires regulators and law enforcement that will actually punish those who violate its strictures.