FedUpUSA

Archive for the ‘Deficits’ Category

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved.” – Ludwig von Mises

The last week has offered an amusing display of the difference between the cheerleading corporate mainstream media, lying Wall Street shills and the critical thinking analysts like Zero Hedge, Mike Shedlock, Jesse, and John Hussman. What passes for journalism at CNBC and the rest of the mainstream print and TV media is beyond laughable. Their America is all about feelings. Are we confident? Are we bullish? Are we optimistic about the future? America has turned into a giant confidence game. The governing elite spend their time spinning stories about recovery and manipulating public opinion so people will feel good and spend money. Facts are inconvenient to their storyline. The truth is for suckers. They know what is best for us and will tell us what to do and when to do it.

The false storyline last week was the dramatic surge in new jobs. This fantastic news was utilized by the six banks that account for 80% of the stock market trading to propel the NASDAQ to an eleven year high and the Dow Jones to a four year high. The compliant corporate press did their part with blaring headlines of good cheer. The entire sham was designed to make Joe the Plumber pull out one of his 15 credit cards and buy a new 72 inch 3D HDTV for this weekend’s Super Bowl. When you watch a CNBC talking head interviewing a Wall Street shyster realize you have the 1% interviewing the .01% about how great things are.

What you most certainly did not hear from the MSM is that the NASDAQ is still down 42% from its 2000 high of 5,048. None of the brain dead twits on CNBC pointed out the S&P 500 is trading at the exact same level it reached on April 8, 1999. Twelve or thirteen years of zero or negative returns are meaningless when a story needs to be sold. On Friday the hyperbole utilized by the media mouthpieces was off the charts, leading to an all-out brawl between the critical thinking blogosphere and the non-thinking ”professionals” spouting the government sanctioned propaganda. Accusations flew back and forth about who was misinterpreting the data. I found it hysterical that anyone would debate the accuracy of BLS (Bureau of Lies & Swindles) data.

The drones at this government propaganda agency relentlessly massage the data until they achieve a happy ending. They use a birth/death model to create jobs out of thin air, later adjusting those phantom jobs away in a press release on a Friday night. They create new categories of Americans to pretend they aren’t really unemployed. They use more models to make adjustments for seasonality. Then they make massive one-time adjustments for the Census. Essentially, you can conclude that anything the BLS reports on a monthly basis is a wild ass guess, massaged to present the most optimistic view of the world. The government preferred unemployment rate of 8.3% is a terrible joke and the MSM dutifully spouts this drivel to a zombie-like public. If the governing elite were to report the truth, the public would realize we are in the midst of a 2nd Great Depression.

The unemployment rate during the Great Depression reached 25%. Without the BLS “adjustments” the real unemployment rate in this country is 23%. Cheerleading and packaging the data in a way to mislead the public does not change the facts:

• There are 242 million working age Americans. Only 142 million Americans are working. For the math challenged, such as CNBC analysts, that means 100 million working age Americans (41.5%) are not working. But don’t worry, the BLS says the unemployment rate is only 8.3%. Things are going so swimmingly well in this country the other 33.2% are kicking back enjoying the good life.
• The labor force participation rate and employment to population ratio are at 30 year lows. The number of Americans supposedly not in the labor force is at an all-time record of 87.9 million. A corporate MSM pundit like Steve Liesman would explain this away as the Baby Boomers beginning to retire. Great storyline, but the facts prove that old timers are so desperate for cash they have dramatically increased their participation in the labor market.

• The data being dished out by the government on a daily basis does not pass the smell test. The working age population since 2000 has grown by 30 million people. The number of people working has grown by only 4.7 million. A critical thinker would conclude the unemployment rate should be dramatically higher than the reported 8.3%. But the government falsely reports the labor force has only increased by 11.8 million in the last eleven years. They have the gall to report that 17.9 million Americans just decided to leave the workforce. The economy was booming in 2000. It sucks today. Don’t more people need jobs when times are tougher? The Boomers retiring storyline has already proven to be false. The fact that 46 million (15% of total population) people are on food stamps is a testament to the BLS lie. A look at history proves how badly the current figures reek to high heaven:
• 2000 to 2011 – Not in Labor Force increased by 17.9 million.
• 1990′s – Not in Labor Force increased by 5 million.
• 1980′s – Not in Labor Force increased by 1.7 million.
• The Not in the Labor Force category is utilized to hide how bad the employment situation in this country really is. They conclude that 17 million out of 38 million Americans between the ages of 16 and 24 are not in the labor force. That is complete bullshit. From the time I turned 16, I worked. Everyone I knew worked. I worked through high school and college. It is a lie that 45% of these people don’t want a job. If you dig into their data, you realize the horrific state of employment in this country:
• 74% of 16 to 19 year olds are not employed
• 85% of black 16 to 19 year olds are not employed
• 31% of black 25 to 54 year old men are not employed
• 40% of 20 to 24 year olds are not employed
• 22% of 25 to 29 year old males are not employed
• 22% of 50 to 54 year old males are not employed
• According to the BLS, 11% of men between 25 and 54 are not in the labor force

Not only is real unemployment at Depressionary levels, but those that do have jobs are falling further and further behind. Wages have gone up less than 2% in the last year and have been rising at an annual rate below 3% for the last four years. According to our friends at the BLS, inflation has risen 3% in the last year. This is almost as ludicrous as their unemployment rate. Anyone living in the real world, as opposed to the BLS model world, knows that inflation on the things we need to live has been rising in excess of 10%. It is a fact that if you measure CPI exactly as it was measured in 1980, at the outset of our great debt inflation, it exceeds 10% versus the fake 3% reported without question by the MSM to a non-thinking public. A poor schmuck making the median salary of $25,000 who gets a 2% raise thinks he has $500 more to spend when in reality he has lost $2,000 of purchasing power. Federal Reserve created inflation is an insidious hidden tax that destroys the 99%, while enriching the 1%.

Until Debt Do Us Part

“Insanity is doing the same thing, over and over again, but expecting different results.” – Albert Einstein

The recovery storyline being touted by the oligarchy of politicians, bankers and media is designed to make consumers feel better. This is a key part of their master plan. Any honest assessment of the financial disaster that struck in 2008 would conclude it was caused by too much debt peddled to too many people incapable of paying it back, too few banks having too much power, the Federal Reserve keeping interest rates too low for too long, and that same Federal Reserve doing too little regulating of the Too Big To Fail Wall Street mega-banks. I wonder what Albert Einstein would think about the “solutions” rolled out to fix our debt problem. Would he find it insane that total credit market debt has actually risen to an all-time high of $53.8 trillion, up $533 billion from the previous 2008 peak? Our leaders have added $6.1 trillion to our National Debt in the last four years, a mere 66% increase. This unprecedented level of borrowing certainly did not benefit the American people, as real GDP has risen by $96 billion, or 0.7%, over the last four years.

Would Einstein find it insane that the governing elite would encourage the 4 biggest banks, that were the main culprits in creating a worldwide financial collapse, to actually get bigger? The largest banks in the U.S. now control 72% of all the deposits in the country versus 68.5% in 2008. The Too Big To Fail are now Too Bigger To Fail. Rather than liquidating the bad debts, breaking up the insolvent banks, selling off the good assets to well run banks, firing the executives, and wiping out the shareholders & bondholders foolish enough to invest in these badly run casinos, the powers that be chose to protect their fellow .01% brethren and throw the 99% under the bus.

Ben Bernanke, in conjunction with Tim Geithner and his masters on Wall Street, implemented a zero interest rate policy designed to enrich the Wall Street banks, force investors into the stock market, and encourage Americans to borrow and spend like it was 2005 again. Rather than accepting that our economy has been warped for decades, with over-consumption utilizing debt as the driving force, and allowing a reset, the Federal Reserve insanely encouraging banks and consumers to do the same thing again. We do know Bernanke has stolen $450 billion of interest income going to savers and senior citizens and handed it to Jamie Dimon, Vikrim Pandit, Lloyd Blankfein and the rest of the Wall Street cabal. The “austerity is bad” storyline is pounded home on a daily basis by the politicians, corporate chieftains, Wall Street billionaires, and MSM pundits. The definition of austere is “practicing great self-denial”. Did you see the mob scenes on Black Friday? Americans are incapable of any self-denial, let alone great self-denial, and the masters of our country will not allow it to happen. One look at our GDP figures confirms the non-austerity occurring in this country. In 2007, prior to the collapse, consumer spending accounted for 69.7% of GDP. Today, consumer spending accounts for 71% of GDP, with investment accounting for 12.7% of GDP. In the good old days of 1979 prior to the epic debt bubble, when the financial industry do not run this country, consumer spending accounted for 62% of GDP and investment accounted for 19% of GDP. What an insane concept. You spend less than you make and save the difference. You then invest that money where you can get a reasonable return (.15% in a money market account is not exactly reasonable).

As Ludwig von Mises pointed out, a false boom created by credit expansion will ultimately collapse. We had the chance in 2008 – 2009 to voluntarily abandon the Wall Street induced credit expansion and allow our country to reset. The pain and misery would have been great, especially for the 1% who own most of the stocks, bonds and peddle the debt to the ignorant masses. As you can see in the chart below, the powers that be need debt per employed American to grow at an ever increasing rate to maintain their power and wealth. The miniscule reduction in debt from 2009 to 2011 was unacceptable. The governing powers will not be satisfied until von Mises’ final currency catastrophe is achieved.

Bernanke and his Wall Street puppet masters’ plan is actually quite simple. It’s essentially a confidence game. A confidence game (also known as a con, flim flam, gaffle, grift, hustle, scam, scheme, or swindle) is an attempt to defraud a group by gaining their confidence. The people who commit such tricks are often known as con men, con artists, or grifters. The con man often works with one or more accomplices called shills, who help manipulate the mark into accepting the con man’s plan. In a traditional confidence game, the mark is led to believe that he will be able to win money or some other prize by doing some task. The accomplices may pretend to be random strangers who have benefited from successfully performing the task. Bernanke and the 1% are the con men. They are attempting to defraud the 99% by convincing them their “solutions” will benefit them. The shills acting as accomplices are Wall Street bankers, bought off economists, politicians, journalists, and mainstream media pundits. You are the mark. The game has multiple facets but is based on more freely flowing low interest easy debt. The con man has reduced interest rates to zero at the behest of his puppet masters. The Wall Street accomplices offer enticing financing to the marks for big ticket items like automobiles, furniture and electronics. As the marks go further into debt, the Wall Street shills report record earnings ($26 billion from loan loss reserve accounting entries), consumer spending rises and GDP goes higher. The mainstream media accomplices dutifully report an improving economy. The government accomplices massage the employment and inflation data and declare a jobs recovery with no inflation. The marks are supposed to feel better about the future and spend even more borrowed money. This is what is considered a self-sustaining recovery by the psychopaths running this country.

All you have to do is open your daily paper to see the confidence game in full display. Last week the MSM reported another surge in automobile sales. Our beloved American automobile manufacturers are back baby!!! Automobile sales are now pacing above 14 million on an annual basis. This is up from the depths of the recession in 2009 when the annual rate was below 10 million. We’ve breached the Cash For Clunkers level and there is nowhere to go but up. The storyline is that Obama was right to save GM and Chrysler with your tax dollars. They are now making splendid vehicles (except for the exploding Chevy Volts) and employing millions of Americans. This is a true American comeback success story. Clint Eastwood should do a commercial about it.

There is one little problem with this storyline. It’s bullshit. Remember GMAC? You bailed them out when all their subprime auto and mortgage loans went bad in 2009. They have a brand new business plan. Change your name to Ally Bank and start making as many subprime auto loans as possible. You will be happy to know that according to Experian, 45% of all auto loans being made today are to subprime borrowers. What could possibly go wrong? In addition, the average loan term has grown to almost 6 years. Executives at Ally Financial said that subprime car lending had become “very attractive” because profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay what they owe. I’m sure they have everything completely under control. Gina Proia, a company spokeswoman, said the company places “greater emphasis on the higher end of the nonprime spectrum” and only lends to people who show they can pay. I can’t believe they are restricting their loans to only people who they think can pay. I’m surprised Obama isn’t condemning them for such restrictive loan terms. If you open your paper to the auto section you will see financing offers of $0 down-payment, and 0% interest for 7 years across the board on most models. But why buy, when you can lease a luxury automobile for $300 per month? It is simply amazing how many vehicles you can “sell” when “credit challenged” Americans can rent them for seven years. I wonder if this explains why I see dozens of $40,000 luxury autos parked in front of $25,000 dilapidated hovels during my daily commute through West Philadelphia. It also seems the Big Three are “selling” a few extra vehicles to their dealers in January as pointed out by Zero Hedge. No need to let a few facts get in the way of a feel good story.

• Ford month-end inventory 86-day supply at end of Jan. (492k vehicles) vs 60-day supply (466k) as of Dec. 31
• Chrysler had 83-day supply (349k units) end of Jan. vs 64-day (326k units) as of Dec. 31
• GM month-end inventory 89-day supply (619k units) vs 67-day supply (583k) Dec. 31

The facts prove the issuance of billions in easy credit is creating the illusion of recovery. Non- revolving (auto & student loans) consumer credit outstanding is now at an all-time high of $1.7 trillion. Even with billions in bad debt write-offs since 2009 the amount outstanding has risen by $100 billion. Does this sound like austerity is gripping the nation? The Federal government is dishing out student loans like candy, as hundreds of thousands of students get worthless degrees from for-profit diploma mills like the University of Phoenix and its ilk. By keeping them occupied in school, the government is able to keep them in the Not in the Labor Force category. Not to be outdone, our friends at GE Capital, Wells Fargo and the other too big to fail entities have been doing their part on the revolving credit side of the scam. I’ve recently been seeing an ad by the largest U.S. furniture retailer, Ashley Furniture, offering 0% interest with no payments for 7 years. I don’t know about you, but my kids destroy a couch in less than 7 years. Wells Fargo Credit doesn’t seem too worried. A critical thinker might ask, how can Wells Fargo possibly make money offering these terms? But there is the rub. Ben Bernanke is loaning Wells Fargo money at 0% so they can perpetuate the confidence game. These insane bankers truly believe they can kick start this moribund debt saturated economy by issuing billions more in debt to people incapable of repaying them. Einstein would be amused.

The McKinsey Group put out a report a couple weeks ago analyzing the amount of American household debt and optimistically concluding that it could be back on a sustainable path by 2013. Mike Shedlock pointed out that sustainable is in the eye of the beholder. It seems the bright fellows at McKinsey haven’t grasped the concept of regression to the mean. First of all their analysis is flawed because real disposable personal income is actually declining and Ben Bernanke’s master scam is working and Americans are now adding to their household debt. The little blue line has turned upwards since they gathered their data. Secondly, as Mish so accurately points out, the sustainable level of household debt is really at the levels prior to the debt bubble that began in the early 1980s. That is a debt level of approximately 70% of disposable personal income, as opposed to the current level of 110%.

The implications of household debt levels regressing to their long-term mean would be catastrophic to the 1%. Their kingdom of debt would come crashing down. Their power and wealth would be swept away. This is why it is so vital for them to create the illusion of recovery. Their confidence game is built upon an ever increasing flow of credit expansion. It will not work. There is no avoiding the final collapse of a boom created solely by credit expansion. Those in power will never voluntarily relinquish their grand game of pillaging the wealth of the nation, so economic collapse will be the ultimate result. They will continue to use propaganda, printing presses, and half-truths to further their agenda. But those who examine the facts will come to a logical conclusion that we are being sold a great lie.

“Half the truth is often a great lie.” – Benjamin Franklin

The Burning Platform

This is an interesting op-ed in the morning edition of the WSJ:

We’re now in the 37th month of central government manipulation of the free-market system through the Federal Reserve’s near-zero interest rate policy. Is it working?

Business and consumer loan demand remains modest in part because there’s no hurry to borrow at today’s super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?

Why borrow at all, in the main?  Borrowing is the taking of leverage — “gearing.”  It magnifies both gains and losses, and it is the losses that turn into trouble, as often they wind up being borne by someone other than the borrower.

They’re supposed to be borne by the borrower and lender, incidentally.  But the lender rarely actually eats them, especially when things get “really bad” — then the taxpayer gets soaked, directly or indirectly, as we have seen.

Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first “do no harm.” The same can be said of monetary policy. The Fed’s prolonged, “emergency” near-zero interest rate policy is now harming our economy.

It always was Charles.

The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money. It is sitting there, in banks all across America, unused.

No.  Capital and borrowing are not the same thing.  They spend the same, but they’re not the same.  Capital is economic surplus — that which you have after you earn and pay the necessities of life (or to run your business.)  Borrowing is leverage — “mechanical advantage” if you will, but it is always a negative-sum game as not only does it have to be paid back but the interest expense means you must earn even more to pay it with.

The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth—it simply isn’t being put to work fast enough.

The paradox of debt is that due to the negative sum nature of it there is always less of a multiplier than the liquidity increase would suggest.  That is, mathematically it is a negative game for the borrower in every case.  This does not mean that a borrower cannot turn that disadvantage into advantage, but it does mean that the odds are against him or her in doing so.

The poker player in Vegas is at a similar disadvantage due to the house “rake.”  If six similarly-skilled players sit at a poker table in Vegas and play long enough they will all wind up broke, because the house rake will consume all their money.  It is a certainty if the game goes on for long enough, the skills are evenly-enough matched, and their luck is reasonably even.

The only way for such a player to win is to be better than the other people at the table by a sufficient amount to overcome the house rake.  He must also stop playing when he has amassed enough winnings and depart.  This means that for the player of superior skill he is incented to play at a higher level of wager, becasue he wants the fewest number of hands dealt to make his money to keep the rake’s “rape” of his stack to a reasonable level.

We’ve also seen a destructive run of capital out of Europe and into safe U.S. assets such as Treasury bonds, reflecting a world-wide aversion to risk. New business formation is at record lows, according to Census Bureau data. There is still insufficient confidence among business people and consumers to spark an investment and growth boom.

Business formation comes from capital formation which is the product of economic surplus.  That’s all.  Since capital formation is born of savings, that is, economic surplus, zero interest rates destroy the incentive to do so.  Low interest rates tend to cause people to borrow for uneconomic purpose, just as inflation provides incentive to buy things that aren’t really needed right now “because they’ll go up in price tomorrow.”  This is all malinvestment of one form or another and it’s destructive to the health of the economy.

Just look at SYSCO, which reported results this morning.  They showed that food inflation was 6.8% over the last year, contrary to the government lie that “inflation is non-existent.”  Uh huh.

What Mr. Schwab is missing here is that The Fed is hardly an “independent” central bank.  It is in fact beholden to Congress, which has pumped up $5 trillion in debt over the last three years.  That debt has a servicing cost, and it is the “ultra low” interest rates that make this temporarily affordable.

How is Congress going to service this debt when the rate of interest rises?  More to the point, where are the adults in the room in Washington DC?  We’ve had this on both sides of the aisle — “we must stimulate the economy!” — with borrowed money.

Outright bribery of the electorate both hasn’t and can’t work to lead to a durable recovery.  Instead, it has backed Bernanke and Congress into a corner.  When rates rise to just a blended 4% Congress will be facing a $600 billion annual interest bill.  From where will the money come?

This is the trap into which Japan fell and what we are facing today.  It is an extraordinarily destructive cycle that is very, very difficult to break, because it requires pulling the liquidity support at the same time Congress dramatically raises taxes, cuts spending (real cuts, not the imaginary cuts from “baseline” budgeting) or both.  In short it requires admitting that we took fiscal heroin to avoid pain and accepting the accumulated damage for a period of time, accepting the “deferred depression” that we all tried to hide.

Charles Schwab leaves this unsaid, of course, but then again he’s running a brokerage.  Were people to think this thing through they’d realize that the mathematical conundrum presented by Schwab has no resolution that doesn’t ultimately result in that contraction asserting itself.  There is always the matter of timing, but not outcome — that which is fueled by nothing other than fiscal methamphetamine either leads to a nasty crash when you stop taking or heart failure.  Pick one — both suck but while one is nasty the other is fatal.

CBO Confirms Tickerguy’s Projections…..

Here’s the old sign again…

(Reuters) – Gvernment spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country’s total economic output, congressional researchers said on Tuesday.

In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit.

That’s not going to happen, because it can’t.  That number would represent approximately 1/2 of today’s Federal Budget, incidentally.

The bad news is that it doubles again in another eight years.

This is the nature of all exponential functions folks.  Compound growth just is, and it is never, ever sustainable over the intermediate and longer term.  Yet we’ve played this game since 1980, with medical spending by the Federal Government expanding at roughly 9% for that entire 30 years.

What’s worse is that the bolded text is false — in the private sector insurance costs are rising at least as fast as they are in the government.  When I ran MCSNet in the 1990s we were seeing double-digit premium increases every single year, and this is still going on.  The only way to keep it under some resemblance of control was to cut back on the offered services in the plan, but on a “like-for-like” basis there was never a year during my time running MCSNet that we saw increases under 10%. 

Not once.

There is no solution to this problem that can be found with “reform” of Medicare and Medicaid.  The problem lies in the underlying medical system in this country and addressing it must happen there, not through things like Obamacare or changes in the government side.

The ridiculous growth in medical costs have come from ridiculous cost-shifting and obfuscation, along with a completely-unrealistic set of expectations.

Consider the cost of putting a man on the moon.  We can do it, but it’s ridiculously expensive.  Likewise, we can put men in space at the ISS, but on a per-person basis it’s ridiculously expensive.  Ditto for flying in a private jet — yes, you can do it, but it’s ridiculously expensive.

Now consider what would happen if everyone could demand and enforce via government a ride in a moon rocket, a month at the ISS, or the ability to walk into any executive airport and demand that the Lear sitting there immediately take off for Bermuda, irrespective of how much money you had in your bank account!

That’s exactly what we’ve done in the medical system.

Provenge is just one example.  Dendreon developed the drug for late-stage metastatic prostate cancer, a terrible disease.  Statistically it adds 4 months to your life, but costs $100,000.  So for about a quarter of a million dollars per person-year, you can have it — the problem is that you don’t need to have the quarter of a million bucks first, or choose to spend your own funds on the treatment.

Bypass operations and myriad other very expensive procedures, drugs and devices are also part of this problem.  Many chronic conditions have costs in the tens or even over a hundred thousand a year, yet your access to those treatments is not conditioned either by your lifestyle choices that led to the problem (or lack thereof) or your ability and willingness to personally spend the money.

The medical industry capitalizes on all of this and then adds both anti-trust exemptions and intentional forced cost-shifting onto the backs of those who can pay for those who can’t.  This is why the aspirin in the hospital costs $25 — you’re paying for Juanita the illegal immigrant who showed up last night in labor at 7-1/2 months, having drunk and drugged herself during pregnancy while receiving zero prenatal care, and pooped out a severely-underweight kid who’s now in the NICU and is in the process of running up a million dollar tab.  This happens every single day and it is why you can buy the same operation in India, performed by a US trained doctor with US medicines, devices, and operating room equipment with a hospital room that is equipped like a luxury suite in the Ritz-Carlton to recover in for 1/5th the cost of the same procedure here in the United States.

Then there’s defensive medicine.  You show up with a non-specific pain in the abdomen.  The doc checks what he can and rules out appendicitis (an immediate emergency) and a few other things.  Now there’s a problem — he has a list of a dozen things running around in his head that could be wrong with you.  There’s a 10% chance that one of the couple of really nasty ones (such as cancer) are involved but ruling them out will require $5,000 worth of tests.  The odds, however, are 90% that the problem is not serious and is something as simple as a mild case of food poisoning.  Who’s money and risk is involved in the decision as to whether or not to run those tests?  Today, the answer is that they get run every single time because if he doesn’t and you hit the bad dice roll you’ll sue (and win.) 

In short you’re not required to allocate the risk and cost on your own.

There’s no fix for Medicare and Medicaid, nor for the Federal budget, without resolving all of this.  And make no mistake folks, this will blow up and destroy not only the federal budget but privately-provided medical care as well within the next five years if we don’t stop it right now.

This is tiring – and predictable.

Europe is now haunted by the specter of debt. All European leaders quail before it. To exorcise the demon, they are putting their economies through the wringer.

It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.

To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.

WRONG.

The only way to cut the debt is to have GDP grow faster than the debt does (or, if GDP is shrinking, debt must shrink more)

Here’s the problem in a nutshell — we’ve not done that for 30 years:

Or, if you prefer this in 5-year “chunks” to average it all out…

Here’s the theoretical curve that fits that second chart quite-closely, don’t you think?

That latter one by the way is right out of the book Leverage.  It illustrates what ultimately must happen when you try to run this scheme — eventually interest payments exceed the total amount of GDP available and then you must default.

Of course actual default happens long before the theoretical limits, because whether you’re a government, a company or a household there are things you have to spend money on besides interest.  As such you cannot continue this charade to its mathematical conclusion.

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

This is the mother and father of all frauds and those who suggest it should be taken to town square where they are flogged, drawn and quartered with their remains used to feed feral cats.  The reason is that when you emit more “money” you are increasing the denominator of currency in the system.  When you increase the denominator the value of every unit of currency decreases.  That is, you are directly and immediately taxing everyone in the economy that uses that currency by stealth — an intentional and malicious act of fraud.

You are stealing from each and every one of those people and when a common man does such a thing we call it what it is: Counterfeiting.

This, incidentally, under the original Coinage Act (of 1792) was punishable by death.  That was a proper punishment as it was literal theft from the body politic by stealth.  We should bring back such a penalty and impose it upon those who try to demand that the public be robbed through counterfeiting, which is exactly what this “policy” amounts to.

The actual problem is that governments love to make political promises they cannot find the money to pay for with current taxes.  That is, they promise what they cannot deliver as they are making promises to spend more than the economy is expanding on a percentage basis.  This in turn leads them to “borrow” money they have no intention of ever paying back.

Then, having committed this sin, they go looking for a Unicorn that crap out pretty colored candies so they do not have to admit that they defrauded the voters who put them in office by uttering bald-faced lies with the full knowledge and intent of screwing the citizenry down the road — after, of course, they’ve gotten rich and left office.

But Unicorns are mythical creatures and that thing you’re about to bite into is not candy.

These promises are a classic Ponzi Scheme.  They’re felonious when put into practice by anyone in the private sector and invariably (and justly so) lead to long prison sentences.  The law in the United States once recognized that this crime when committed by government officials was even more severe than that executed by private parties, because the “remedy” that people would propose (as Robert has done) would inherently be to screw literally everyone through debasement.

As such the penalty for such an offense was set as death.

Bring back the Coinage Act of 1792 and harness the horses. 

The feral cat population is hungry.

The Market-Ticker

Discussion (registration required to post)

On April 1st 2007 the very first Tickers were written.  In just a bit over two months, The Market Ticker will be five years of age.

And through that time The Market Ticker has pointed out one central fact behind everything published here: You cannot spend more than you take in on an indefinite basis.

This, of course, is anathema to a nation — and a world, really — that has done exactly that for more than three decades.  Many of the citizens of the world — those under about 35 (as your first few years of life have little direct connection in a cerebral sense to economics) have never known a world where overspending and ponzi economics was not practiced.

You can’t exactly flaw people for not understanding that a thing is broken when they’ve never experienced life in any other way.  And for those who are somewhat older, those of us who remember the 1970s, the oil shocks, gas lines and 5 gallon purchase limits along with grocery store prices that seemed to double every six months (it wasn’t quite that bad — but it was bad!) it is easy to get the mistaken impression that what we’ve had for the last 30 years “fixed” what was broken in the 1970s.

It didn’t, of course.

The world had run on it a simple fraud covered in various layers of complexity to hide it from the common man, just as has been done many times before.  The 1920s were the same thing, basically, minus the computers but also minus fast information sharing.  The land swindles of the day in Florida were almost identical to the condo-flipping schemes here in the Panhandle when you boiled them all down; tiny down payments on construction not yet initiated, the promise of ever-higher valuations, carnival-style barkers spinning rags-to-riches stories and you only needed $10,000 to get in “on the ground floor” of an elevator that would take you to the sky.  Sign right here mister, and your life of luxury and privilege will begin.

Uh huh.

Last night the yarn-spinning continued on Greece.  Bloomberg said:

Greece and its private creditors said early today they had made progress during talks in Athens on a debt-swap accord needed to lower the country’s borrowings and clear the way for a second round of international aid.

“The elements of an unprecedented voluntary private-sector involvement are coming into place,” according to an e-mailed statement from Charles Dallara, managing director of the Institute of International Finance, a Washington-based lobby group representing creditors negotiating with the government.

Sure they did.  Sure Greece is going to pay debts of more than 100% of its GDP — even after the “restructuring.”  And sure this is “voluntary” — in more-or-less the same way that it’s “voluntary” that you hand over your wallet when there’s a gun up your nose.

The real problem is that people — and governments — borrowed money they couldn’t pay back off their economic surplus.  For a private-sector entity (a person or company) economic surplus is easy to define — it’s what you have left after you spend on the bare necessities of life.  When those necessities (such as your house) become part of the overborrowing then the situation appears more complex but it really isn’t — you just “upscaled” your view of what was a “necessity.”

But let’s face facts — a trashy trailer on a 100×50′ piece of rented land with utility connections is more than the “bare necessities” when it comes to housing — by a lot!  I lived in a little 400sq/ft one-bedroom apartment for a good while when I was just getting started and that was more than “bare necessities” (by a lot) for even modern comforts.  A studio would have been sufficient, since I had no dependents and was single.

The same applies to transportation.  Most people today in the United States are driving around in vehicles that have values that are two, three, five or even ten times the cost of “basic necessities” for the required task (getting to work, the grocery store, etc.)  It was in fact in the recent-enough past that I owned said vehicles that the “basic car” had an AM radio with one speaker, a manual transmission, no air conditioning, no power door locks, no power windows, no power steering, no power seats and the seat coverings were vinyl.  You could also see (and work on) all sides of the engine and the road under it when you popped the hood.

In fact, one of the pieces of said “basic transportation” that I owned in my earlier years (and drove to work every day) was one of these:

Before that I had one of these in considerably worse condition than pictured (it was gray and had a smashed-in passenger side door from a collision prior to my acquiring it for a literal cost of $100.)

THOSE were “basic transportation” and not only where they cheap to buy they cost almost-nothing to insure because there was no reason to have collision or comprehensive coverage on them!  The Vega, incidentally, consumed a quart of oil per tank of gas on good days (and worse on bad ones) along with having a habit of slowly eating coolant.  Yeah.

I’m not saying you shouldn’t own this, incidentally:

IF you can afford it without debt, and without spending more than you make.  That is, if you can pay for it using your personal economic surplus.

But recognition of these facts is rather jarring for most people.  Some of us grew up understanding it; our parents owned one car that was much nicer than the other (and was used to get to work) while the other was, literally, “basic transportation” (with no power anything and no air conditioning) if we had a second car at all.  We rode bicycles to our friend’s home rather than being carted around by “soccer moms” in no small part because driving the car cost money; the bike cost only human power.  Nice bicycles (which most of us could not afford) had 10 speeds; the more-ordinary ones that nearly all of us actually owned had coaster brakes and one speed.

Let’s put this in a slightly-different perspective.  The poverty level income for a single person in the United States today (as of 2011) is $10,890.  Many people reading this, perhaps most, spend more than 1/10th of that on their cellphone bills.  A further significant proportion of the population spends more than 1/10th of this on their cable or satellite TV bill and the overlap between the two is significant.

That is, a very significant percentage of the population spends more than a quarter of poverty level income on two luxury and entertainment items which are utterly unnecessary.

Again, none of this is a problem if you can afford it.

But what should you have paid for first?

Well, for one, a very significant financial reserve.  Your retirement, for example, never mind a cushion in case something goes wrong (like losing your job.)

With governments its equally-simple: Government gets all of its money by taxing it.

Yes, all of it.

I know, some people will say “they can print it!” or “they can borrow it!” but in fact on a long enough timeline all of that is taxed.

If the currency is debased the taxation happens immediately and hits everyone at once.  If it’s borrowed then the taxes fall on you tomorrow, assuming it’s ever paid back.  There’s no real difference, when you boil it all down, other than the immediacy of payment.

All of it, in the end, comes down to taxing you — taking your money and giving it to someone else.

That’s all government does.

This weekend dawned with the news that Greece’s creditors have walked out of their meeting.  That in and of itself is probably not all that important.  What is important, however, is the rising tide of speeches coming from various government officers in Europe recognizing that deficit spending has to end.

It’s not just there — Fed President Dennis Lockhart has said the same thing about the United States.  What was just a few lone bloggers in the wilderness a few years ago, myself included, has now turned to policy-makers inside and outside of the government itself.

At the core of this problem is the buying of votes with money that doesn’t exist.  It’s very popular to do things like that, as having the necessary adult conversation regarding the sustainable level of spending by government — and the adjustment that comes to GDP and thus overall consumption when overspending stops — tends to bring revolt at the ballot box.

But there comes a time when the political expedience of vote-buying and other chicanery simply cannot be sustained any more.  We’re within sight of that cliff, and if we do not act we will go over it.

If you remember the speeches from Bernanke in the 2008/09 time frame he counseled that we must get our budget deficit under control in the “intermediate term.”  But exactly what is “the intermediate term?”  This again leads back to the fundamental nature of exponential growth and how badly you’re screwed if you ignore it.

In 1980 the Federal Government spent $53 billion on health care all-in. Last year it was about $820 billion.  That’s a roughly 9% compounded rate of increase.

The rule of 72 says that this means the spending will double again in roughly 8 more years (2019) to $1.64 trillion, then in 8 more (2027) to $3.28 trillion, which is approximately the size of the entire federal budget today.

Obviously that won’t happen as you can’t raise that much money, but that’s exactly what our politicians are promising people over the age of 50 when they say “Medicare will not change for those over 50” as that rate of expansion simply gets you to where you qualify at age 65!  There will be two more doublings required to get you to 80 years of age, which (if it was possible) would rack that number to over $13 trillion dollars — close to the size of the entire economy today.

Bluntly: Such claims are a lie.

What’s worse is the curve when you look at government debt.  Let’s chart it:

Pick a point on that graph.  Even at the most-optimistic number — 2006 or 2007, when we were creating massive amounts of private credit to prop up an about-to-explode housing bubble — federal debt was still growing at over 6% a year.  That means it was doubling every 12 years!

In 2008 and 2009 we grew it at 15% or more a year.  That means it was doubling every 4.8 years.

Does anyone really think we’ll get away with either of those statistics given what we now know is happening in Greece and elsewhere in Europe?  Remember, Japan, which is the common poster child for this, came into their government debt binge with massive private savings — savings that have been essentially all consumed by that binge.  We never had the private savings in the first place, which means we have nothing to consume in previously-earned economic surplus!

Folks, there is not one year in the last decade during which we can point to a sustainable level of debt.  If you go back into the 1990s there were a few years during which federal debt expanded at a much-more-modest rate, but those were years during which private credit creation was expanding exponentially in place of the government (through the Internet bubble.)

There isn’t any way out of this through more government debt.  It has to stop, and stop now, because the nature of exponential growth is that the rate of damage accelerates.

If you read (again) my Ticker from 10-18 of last year, you should understand what’s going on — and what we face.  This is simply not about what I want, what I’d like, what pundits would like to do or anything of the sort.

It is about mathematical reality.

Think about exactly how much further we can expand government spending in this regard and not have the entire economy collapse around us.  Then reduce that percentage of increase to “doubling times” and you know where the wall is, in your best estimate.  Nobody who does this exercise can come up with a number that is larger than the number of fingers you have on one hand.

Look, I don’t like what taking our medicine means, and the reason I wrote Leverage was because I had gotten very tired of people saying “nobody could have seen this coming.“  In addition, there are a whole host of people who have sounded the warning horns for a while, yet they have no cogent plan to resolve the problem or help buffer the inevitable (and severe) pain that must be endured.  Some of them, including some political candidates for President this time around, understand the problem and even propose massive budget changes (e.g. $1 trillion a year in spending cuts) yet have no plan to buffer the economy and the people from what will, left alone, be a contraction in overall GDP of up to 25% and the Depression that will inevitably come with it — a Depression worse than the 1930s!  That is outrageously irresponsible and worse it will never get passed because without those buffers it is not only unnecessarily harsh but could lead to the collapse of both civil order and our government.

But irrespective of what I would like to see, or what politicians promise, this adjustment — the necessary adjustment — is coming.  It cannot be stopped.  It is mathematically certain, whether people like Bernanke, Obama, Romney and others wish to face it or not.

Your choice is whether to face these facts in your personal and economic life, preparing to the extent you’re able, or whether you will be one of those who claim that you were “blindsided” by the inevitable that you were simply unwilling to face.

The Market-Ticker

Discussion (registration required to post)

Back on January 5, when we first broke the news that the US debt ceiling has been reached, and breached, yet again, we said “And now the Social Security Fund pillaging begins anew until Congress signs off on the latest interim debt ceiling increase.” Sure enough, operation rape and pillage is a go.

• U.S. SUSPENDS PAYMENTS TO PENSION FUND TO AVOID DEBT CAP BREACH
• GEITHNER INFORMS CONGRESS ON SUSPENSION OF PAYMENTS TO FUND
• GEITHNER SAYS `G’ FUND PARTICIPANTS `UNAFFECTED’ BY SUSPENSION
• GEITHNER SAYS `G’ FUND TO BE MADE WHOLE AFTER DEBT LIMIT RAISED
• GEITHNER: DEBT LIMIT WILL BE INCREASED JAN. 27 UNLESS BLOCKED

In other words: Congress better pass the debt ceiling prontt, or else it will have to explain to government retirees the tens of billions in deficit funds, i.e., marketable debt, already issued will permanently offset the level in G-fund holdings.

Lastly, any comparison to similar acts of commingling performed by other insolvent entities in recent months is purely coincidental and no Obama handlers were thrown in jail as a result of this post.

ZeroHedge