More Reality Check — Leverage, The Fed and Congress


You’re not one of those people, are you?

Let’s divide those people into two groups:

  • Government must do more to help {the sick|the children|those poor immigrants|the poor generally|me}

  • It’s all {The Fed’s|foreign interventionism|The Jews|Bilderbergers} fault (Hello Ron Paul and his sycophants!)

If you’re in either of those groups you’re about to be disabused of your silly fantasies, hate me (and stop reading my columns), or perform an act of Internet hari-kari by attempting to post some sort of inane comment (which will result in you being banned.)

By the way, I really don’t particularly care if you choose to do any of the above, but I will be happy to laugh at you should you choose any but the first option.

As I have repeatedly pointed out over the years, most recently in my article about Tax Inversions, from 1980 to today total systemic leverage (that is, debt) has expanded by a factor of about 13, while domestic output (GDP) has increased by a factor of 6.  That’s awful; it tells you that the majority of debt did not go to finance expansion of output (that is, a productive purpose) but rather was ultimately consumed, and not just on a pulled-forward basis either — that is, it was consumed and the products and services consumed are now expended and thus gone.

But it’s even worse when one considers the Federal Government; that has expanded its debt 52.5 times, or four times as much as all actors in the economy in general.

There is a common lie told in the media — particularly in the “business media” — which is that there has been a “de-leveraging”, especially of consumers and businesses.  As is clearly visible in any sort of view of the data that’s false with one exception — financial credit, mostly in the form of “on-book” derivative exposure.  However, government borrowing more than made up the difference; in effect the risk from banks was transferred to the government (that is, to you.)

What needs to be understood in all of this is that Leverage, that is the amount of debt outstanding compared against the size of the economy in general, has exactly one impact in the general sense: It changes price for the simple fact that buyers and sellers are sensitive to the total amount of “moneyness” available in the economy as a whole but it is incapable of changing that thing’s value.

Colleges charge what they do, as do hospitals, doctors and car manufacturers only because someone pays their ask.

Medical care would not cease to exist if nobody paid the current ask.  Nor would college educations or automobiles.  Instead, what was offered would be re-priced downward until equilibrium was re-established.

Now it is true that certain exotic things would probably disappear, simply because an insufficient number of people could pay (perhaps as low as zero, or effectively so among those who would want the service or product.)  But that’s not bad, it’s good — it means that where demand is supply goes, and the economies of scale drive efficiency — exactly as it should be.

Commerce only takes place so long as marginal value exceeds marginal cost.  The dance of buyer and seller that leads to voluntary intercourse in commerce occurs because both the buyer and the seller perceive that marginal value exceeds marginal cost!  If either does not the transaction does not take place.  It’s that simple when you boil it all down.

So what’s happened here?  We have intentionally distorted that computation in the minds of buyers and sellers.

Consider housing — we have been sold (by the NAR and others) that houses “go up in value”, which is impossible.  They might go up in price but the laws of nature say that they must go down in value, not up!  That is, entropy states that all things, left alone, reduce over time to their natural state (that is, rot, decay, and eventually disappear.)  A house does not add living space, bathrooms, showers or other improvements on its own, and such additions never add more value than their price; that’s impossible, and what’s worse is that on the day the addition is made it too starts to decay, whether that’s a new floor or a new refrigerator.

It is this lie that allows a seller to talk you into an uneconomic transaction.  The same has occurred with education; while in some cases the value still exceeds the price it was not that long ago that even a non-specific liberal arts degree was worth well more than it cost.  No more; there are now myriad degrees available that have a factually-negative value in the economic marketplace — an impossibility unless someone is being deceived as essentially nobody will intentionally buy something that has negative value!

Unfortunately huge parts of our economy have been built around these scams.  Those universities are full of people pulling down salaries that would not exist but for these outright deceptions.  The same is true of the medical industry, Wall Street and more.

But here’s the point you should keep in mind when it comes to so-called “value”: The number printed on your monthly account statement for your 401k, IRA or for that matter the alleged “value” of your house is not real until and unless you sell said items and reduce the claimed value to cash.

You simply do not know whether those claimed values are real until they are realized via that process, and further, you don’t know what those alleged dollars will buy either!  How much good does a million dollars do you if a gallon of gasoline costs $500,000?

Yes, that’s an outrageous (and extremely unlikely) example, but the point stands.  What you really want to know is this:

How much labor, in hours, is required to purchase a gallon of gasoline?

Back when I was young minimum wage was $3.10.  Gas was right around a buck a gallon; I needed to work about 20 minutes to buy a gallon of gasoline.  Today the minimum wage is $7.25 but a gallon of gasoline is about $3.50; I have to work 30 minutes, or 50% longer.

The CPI, generally (with all its flaws) stood at 78 in January of 1980.  Today it stands at 238, a factor of 3.  Viewed this way you’re behind; the minimum wage should stand at $9.30, but it doesn’t — and that allows for the outrageous distortions in the CPI!

What distortions?  I go into them in detail in Leverage; the worst of them are found in statistical issues that don’t invalidate the numbers per-se but do in terms of your experience. For instance the price of televisions keeps coming down, but how many do you need to buy compared against gallons of gasoline?  The CPI calculation attempts to deal with this by weighting, but even that is (in some cases intentionally) flawed; one of the worst is “Owners Equivalent Rent” which results in a decrease in the imputed cost of a house as rates go down.  This is horsecrap because as rates go down the actual price of a house goes up!

But it is exactly this sort of intentional and 30-year trend in nonsense that you are sold — repeatedly.

Now contemplate this: Without Federal Debt what does The Fed buy and sell to “regulate” interest rates, given that it must, by law, only trade in federal securities?  Answer: Nothing; getting rid of Federal Deficit Spending and, ultimately, Federal Debt renders The Fed nothing more than a payment clearing house, an impotent body from a policy perspective but one that is utterly necessary for national commerce.

Worse, “ending The Fed” would be catastrophic if you don’t stop deficit spending!  Why?  Because the other existing structures that run on this same scam, most-particularly the Primary Dealer network of banks run by Treasury, would then assume that control without any public or policy oversight whatsoever.  If you think getting ripped off by subprime was bad you’ve seen nothing compared to what would happen if you “Ended The Fed.”

The bottom line is this folks: It is not The Fed that causes these problems nor can we spend more on various programs as Democrats demand without tightening the noose around the neck of the American public.  

The root cause of all of what has happened rests in exactly one place: DEFICIT SPENDING.

Fixing the problem requires doing one thing above all else: ENDING DEFICIT SPENDING NOW.

Second, it requires One Dollar of Capital; the collapse of false promises of credit — that is, factual fraud.

Since such changes would create enormous and immediate deflation in the price of assets, and it would also require the immediate cessation of public welfare spending.  That does not need to impoverish people; indeed, it can do the opposite, as I have also documented.

So why not do all of that?

Simple — you won’t stand up and demand it, accepting short-term economic pain if necessary, organizing your neighbors and otherwise engaging in peaceful and lawful means to bring that all about.  You think you can “muddle through”, and “it will all be ok” if you don’t act to do anything about the present situation.

Unfortunately the laws of mathematics prohibit indefinite expansions of the sort that have been foisted upon you under these false pretenses.  The reason is simple: the amount of expansion must exponentially increase to have the same percentage impact over time.  This is why the Federal Debt has gone up 56x over the last 35 years while GDP has expanded 6x.  That exponential expansion will eventually result in revolt against the entity doing so, and when it does that leverage in the economy will be forciblyremoved as the value of said “levered funds” will drop precipitously on a discounted forward basis.

There are two choices: Do this voluntarily or do it involuntarily.

Exponential expansion to try to fill a hole by a given percentage on a forward annual basis forever is mathematically impossible.

One final point: The Fed has never gotten it right.  Not in the 1970s, not in the 1990s, and not in 2007.  In each of these cases they either silently countenanced this coercion in deficit spending by the Federal Government (remember, this is allegedly an independent central bank!) or notoriously advocated for the very policy they employed that led to the blow-up.

Why would you believe they are any better at it this time around than they were the last three times, and exactly how many more times will you accept the excuses instead of demanding the root cause, that being the actions of Congress and The Executive cease?

Now where did I put my pole and cooler full of something to wet my whistle?  Ah, there it is…..

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