From Karl Denninger
.... before our citizens - and government - wake up?
If you remember in October of 2008 I put forward the following:
As I pointed out at the time, the reason they didn't create that $7 trillion in new credit issuance is that there was no more capacity to take on new debt in the private sector.
They knew it.
They lied about what "had to happen" for stability to be restored.
They lied because the alternative was that their friends - powerful friends - would have to go bankrupt.
But it gets worse. Some of the other points:
Yet that is exactly what we have done - we have replaced fully 10% of private GDP with public spending, and while the claim was made that this is "temporary" the CBO says it is not, Obama's budget says it is not, and the credit contraction that is continuing in the private economy says it is not.
Bernanke and Paulson, and now Geithner, know that this attempted "reflation" won't - and can't - work. They have put forward this path not because it is the right thing to do, but because the alternative means a lot of people with power and money will go bankrupt and the Government of The United States will have to change how it finances itself, removing the corrupt influences that have been used to "cook" the books - and outcomes - for the last 30 years.
We have blown three trillion dollars since these intentionally-wrong decisions were made, and we will continue to blow more and more money until the entire banking and economic system collapse unless we change course.
Nate has updated the debt-GDP contribution chart that I posted back in 2008 (and which was originally generated by Legg-Mason - it's not difficult to generate it from the Federal Reserve Z1) and it shows exactly what I was predicting - and why the policies of the government and Fed not only haven't but can't work:
Now let's be clear: Essentially all money is debt in our current system. As such attempting to "print" your way out, or attempting to "inflate" out, or attempting any act other than forcing the default of the bad debt in the system results in digging the hole deeper and deeper - that is, depressing private GDP further.
Government's efforts have not helped, they have destroyed the four years we had before "zero hour" was reached. Bernanke's interference in the mortgage market didn't "help" that market, he effectively entirely replaced the private market. The Government's "interference" in the private markets by borrowing and spending $3 trillion over the last two years - more than 9% of GDP annualized - is an attempt to "paper over" the insolvency of private actors in the markets - both borrowers and creditors.
These acts of interference did lead to a huge stock market rally, but just as with all forms of cooking the books they are false dawns and false hopes. They present a picture of "solvency" that does not actually exist. They present a picture of private demand in the economy that does not actually exist.
Since we are now below the "zero line" of GDP-contribution from further debt issuance we simply tighten the monetary flat spin by trying to further print or deficit spend.
The chart in the above link has been updated, of course. It now looks like this:
Despite all the printing, despite all the borrow-and-spend politics each new dollar of currency is representing a decreasing monetary velocity multiplier - that is, we now get less than one dollar for each dollar - the real rate of return is now NEGATIVE.
As in a flat spin in an aircraft, you cannot pull up and live. All pulling up does (printing or borrowing more money) is tighten the spiral. I identified this crossover in December of 2008, and warned of it months earlier.
We have tried it Bernanke, Paulson and Geithner's way and it has failed.
We will strike the ground unless immediate corrective action - that is, pushing forward on the stick - occurs.
Taking that corrective action will cause us to lose altitude faster for a while. If we wait until the ground is "too close", we will strike the ground and (economically) die. The precise point where there is no longer enough time (altitude) is not known in advance, but that we have far less margin now, more than a year later, than we did in December of 2008 is a mathematical fact.
To halt this process we must take the following actions now:
Government is enacting "health care reform" today not to reform health care, not to provide health care, but rather to impose an immediate tax on all Americans to attempt to pull up even harder on the monetary stick.
It won't work folks. It can't work. More than 18 months ago I identified the primary failure in the path that was being taken, and why. We have tried it Bernanke, Paulson, Geithner, President Bush and President Obama's way now for nearly three years, and yet there has been no resolution of the debt problem, no resolution of the housing market and no actual economic growth. Instead we have papered over insolvency and lied about the health of both our banking and economic systems.
Meanwhile the cracks in the dam continue to grow. Greece is not just "one little problem" over in Europe. Behind Greece is Spain, Portugal, Italy, Ireland and even Great Britain. None of these nations have yet taken the actions necessary to resolve the problem, for the same reason we have not - it is politically very difficult to tell the entrenched banking interests "you must eat your own cooking - even if you choke on it."
We still have time to choose between bad and horrifically awful. We can choose between recognizing the Depression we are already in (private GDP has contracted by more than 10% from the peak, which is the definition of economic Depression) or we can risk Zombieland or Mad Max becoming reality.
Since Europe and the rest of the world show no desire or expectation to do the right thing, we must either firewall ourselves off from their collapse or we will inevitably go down the bowl with them.
We are risking severe civil unrest and the possible destruction of our republic by our continued refusal to face the mathematical facts, not just a "double dip" recession. What Greece and other nations are seeing now is nothing compared to what is on the horizon and will reach us if we do not act.
Mathematics yield to no political desire or arrogance wielded by man or woman. Those relationships described by mathematics inexorably come to pass, unless you change the equations. In a debt-backed fiat currency world continuing to load debt into a system that has too much debt in it related to production is a futile and self-destructive act, just as is an alcoholic deciding to chug yet another bottle of whiskey.
Economically we are facing liver failure and brain cancer unless we stop gorging on our drug of choice - debt. Whether the consequence of ceasing to do so is politically expedient or not is, at this point, immaterial. We are literally gambling with the ability of this nation to continue forward as a going and peaceful, civil concern.
We still have time to act and do the right thing to halt what will befall us should we continue on our present path, but that time is running out.