The “L” Machine Wobbles


L is for lies

Remember, government says that health insurance is 0.656% (yes, about 1/2 of 1%) of the median family’s budget.  It also says that it has only risen in cost by 2.9% in the last year.  Really?  How’s that square with Obamacare?  That, incidentally, is $328/year or $27/month.  Truth or lie?

Government also says that motor vehicle insurance is 2.485% of the same family’s budget and that has risen 4.2% in the last year.  That would be $1,242/year.  Gee, maybe that one’s fairly close to true.

Then there’s cellular telephone service.  Government says that the median family spends 1.398% of income, or $699/year or $58/month for everyone.  Really?  You can’t get one iPhone plan for that, and the median family has 2.2 people in it.

Now sure, these are averages, so half the people will spend more, and half less.  But the health care debacle is part and parcel of the lie factory.  Obamacare will nail the average family by 10-20x or more of the claimed BLS amount for so-called “health insurance” that will still bankrupt your family if you get seriously sick.

This was not only predictable (I among others predicted exactly this outcome) it was known by Congress itself, which is why Nancy Pelosi and Obama both believed that they had to pass that law before you could know what was in it.  Had it been the other way around there might have been an Iceland-style protest at the Capitol.

You know the one, right?

That one.

But it doesn’t end there with the lies.  Another big lie is that the economy has “De-leveraged.”  No it has not; the second “L” is for Leverage.

There has in fact been no deleveraging at all; net leverage has not materially moved related to GDP:

What has moved is the stock market.  The problem with the “recovery” is that it does not square with reality.  Net systemic leverage remains at double or more historical — and stable — levels.  It is that leverage that has “floated” the stock market (and housing market) higher, but this leverage is an outrageousfraud upon the public because it relies on the claim that one can continue it on a perpetual basis.

That leverage, however, came about only due to ever-decreasing borrowing costs.  Not low and stable borrowing costs, ever-decreasing ones.

Remember how this works:

You borrow $10,000 @ 10%.  Your coupon cost (annually) is $1,000 (interest.)

You never intend to pay back the principal when you initiate this cycle (note that the US Government has never actually reduced its indebtedness over the entirety of this 30 year period.)

Now the cost of borrowing goes to 8%.  You now can borrow $12,500 — another $2,500 in principal — and you do so and immediately spend it.

Then the cost of borrowing goes to 6%.  You can now borrow $16,667 and do so, adding another $4,166 in debt, and you spend that $4,166.

Then the cost of borrowing goes to 4%.  You can then borrow $25,000, $8,333 more, and you do so and spend it.

And finally the cost of borrowing goes to near where it is now, 2%, and you can borrow and spend another $25,000.

You started with $10,000 out in borrowing with a $1,000 interest cost.  You now have $50,000 outstanding with the same $1,000 interest cost, and that $40,000 gets spent, driving up the “price” of assets.

The fact is that this is exactly what has been done, and it is displayed right here:

I didn’t make this chart up.  It is taken from the Fed’s Z1 and BEA’s GDP tables — the canonical sources for data of this sort.  It shows that all economic “growth” over the last 30 years has been nothing more than spending money borrowed on increasingly-cheaper terms, not economic progress.  It has all been a lie.

But during that time period the value of those assets in real terms has not changed.  A 3-bedroom house still sleeps the same number of people, still contains the same number of toilets and still has the same kitchen in it that allows one to prepare the same number of meals.  Further, the premise that led to the increase in the price of the assets is that this cycle can be maintained forever, and this is a lie.  Trees do not grow to the sky and borrowing costs cannot continually decrease forever because nobody lends intentionally at a loss.  Lenders eventually conclude that’s exactly what they’re being asked to do asprices are rising faster than yields will cover, and thus you are losing money by letting someone borrow your capital at those rates.

When that happens the benign outcome is that rates stabilize — the bad outcome is that rates back up.

But the benign outcome still violates the premise on which asset prices are based and both they and the alleged commerce predicated on them collapse.

Ben Bernanke and Congress both, along with the Administration, have gone all-in on a series of lies, as have previous administrations and Congresses.  They all know these are lies as well — not only are they claiming that the so-called “recovery” is real (and not just a machination of The Fed’s games with the credit system) but in addition that it is sustainable, either currently or will be through these policies over time.

That’s a knowing lie because you cannot cheat mathematics and it is not possible to continue to drive interest rates lower indefinitely.  When, not if, that cycle ends the best case is that rates flat-line but that “best case” prohibits continuation of the scam because to maintain these prices one must find someone who believes they will go higher as that is the only reason asset prices are where they sit today.

Netflix, at $327/share, is selling for 407 times earnings.  Amazon, at $319/share, is selling at an infinite multiple as the company lost 23 cents/share in the last quarter.  Tesla has a market cap of $22 billion and lost nearly $2/share last quarter, roughly half the market cap of GM which sells how many cars compared to Tesla and which, incidentally, made $2.79/share.  Facebook sells at 51/share for 230 times earnings.

And it is these stocks that have driven the market indices higher.  Not big industrial concerns.

GE, for example, is up about 4% over the last 12 months.  Tesla is up 670%.

This administration and Congress must step to the microphone and tell the people the truth: The 30-year cycle of ever-decreasing borrowing costs, generated through both government and federal reserve manipulation and intentional falsehoods, is what caused the increase in asset prices during that time and the appearance of prosperity and economic progress.

We can no longer continue this whether we want to or not because the mathematical limits of this policy have been reached.

This decision should have been taken in 2000.  It would have resulted in a ~10% decrease in GDP, but then recovery — real recovery.  It was not and instead we chose to lie.

That decision could have been taken in 2007, and I strongly advocated for same.  It would have resulted in a 20% decrease in GDP, twice as bad, but we would have then recovered.  We instead chose to lie.

The decision now must be taken or it will be made for us, and we might see as much as a 40% GDP decrease in the short term.

We can no longer lie.

The one thing we can do to mitigate the harm is to pop both the educational and health care bubbles.  We can and must break the monopolies in both areas of the economy, which will cause about half of the corrective economic force to be centered in those two industries.  This is critical because this is how we both allow our educational environment to survive and allow people to continue to cover their cost of living while receiving at least reasonable amounts of health care paid for in cash with all costs fully exposed and born by the individual.

Not health care and education as we current know it with the edifices and six or even seven and eight-figure salaries that come with them today, but the structures involved will survive.

We’re both out of time and out of choices, and if Congress and the Administration try to kick the can any further we’re going to lose our future.

This stand-off on the debt and spending is good, not bad.  Congress must not raise the debt ceiling.  The government must balance the budget — now.

We have heard for five years that “the economy isn’t strong enough to do that now but it will be a little while down the road.”  We now know that was a lie, and it wasn’t a mistake either, as anyone who bothered to look knew why the economy “grew” in the past, and it wasn’t true growth — it was leverage-drivenand predicated on that which could not possibly continue.

Time’s up folks and we must face the truth — here, now and today.

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