Karl Denninger, "There Is No Way Out Of This Box..."

"There Is No Way Out Of This Box...

that does not involve serious pain."
By Karl Denninger

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"Go ahead folks - tell me how we can simply ignore this. How we can pretend that the outstanding debt does not have to come back down to reasonable levels. That these levels are "reasonable" - and that these rates of growth are "reasonable." This is the "magic of compounding" writ large - and in a fashion that is going to inflict severe pain on our population - and the longer we wait to deal with it, the worse it will be.

Bernanke, who was at The Fed during Greenspan's time there, should have used his "education" - his claimed knowledge of economics - to make a lot of noise about this and demand that interest rates NOT be lowered to further encourage more debt-based consumption. He did exactly the opposite. As this decade wore on he should have sounded the alarm on our debt binge in all sectors, especially in the financial and consumer sectors where the growth in indebtedness has been the highest. He did exactly the opposite.

Since this crisis began, in fact, every single government official who has spoken on the matter has emphasized even more lending, that is, cranking the amount of debt outstanding even higher, and The Federal Government has made good on their intent by, in the last year, spending more than $1.7 trillion dollars they did not have - that is, they borrowed even more. That "pumping" of credit is why the stock market has "recovered." BUT IT CANNOT AND WILL NOT STAY "recovered", because the debt that is outstanding is unsustainable - interest costs are crushing innovation and we are now absolutely reliant on near-zero interest rates lest everything collapse.

How bad is it? During the same time period that we essentially doubled the debt of households, businesses, the federal government and financial institutions (2000-2009) we added just 40.8% to GDP ($10.129tn to $14.266tn)

You might think it wasn't as bad from 1990-2000 - we went from $5.846tn to $10.129tn in GDP (a 73% increase) while household debt went from 3.58tn to 6.53tn (an 82% increase) and non-financial corporate debt from 3.768tn to 6.195tn (a 64% increase.) This looks reasonable. But financial leverage during that decade went from 2.613tn to 7.521tn, a monstrous 187% increase (!) and government debt from 2.613tn to 7.521tn, also a 187% increase (!), both nearly double the GDP growth rate.

The 1980-1990 years? GDP expanded from $2.915tn to $5.846tn, a clean double. Pretty good! Consumer debt, however, went from $860 billion to $3.58 trillion, a 316% increase. Non-financial corporate leverage went from $1.387tn to $3.768tn, a 172% increase, the Federal Government went from $668 billion to 2.498tn, a 273% increase and financial leverage went from $526 billion to $2.614tn, a 396% increase. The path we have chosen for the last 30 years in this country is clear, convincing, and impossible to continue upon.

THE MATH DOES NOT LIE.

We have not created GDP growth through final demand procured as a consequence of production - that is, people like you and I working with our hands or minds to produce something, then spending the fruits of that labor to buy the things we want and need. Instead, we have used financial leverage to present to ourselves and the world a false belief and "visage" of prosperity that in fact did not and does not exist, with the continuation of this charade absolutely dependent on the unending ability to forever take on more and more debt compared to growth in actual economic output.

Let me be clear lest anyone misunderstand me: There is no means by which we can return this economy to reasonable forward prosperity except by first deflating the excess debt, even though doing so will cause those who have too much leverage outstanding to fail - that is, go bankrupt - either as consumers or businesses. We have in fact hit the wall, as I clearly stated had occurred simply from an examination of the math in the middle of 2007. The facts are in and the math is incontrovertible.

To the politicians of both major political parties: You can either deal with reality or have it slap you upside the head in the form of political, economic and civil collapse.

To the people of this nation: You can either deal with reality and be prepared for the politicians refusing to deal with reality, or you will suffer the consequences of being unprepared when, not if there is political, economic and civil collapse."

"Beware and be prepared America."

- http://market-ticker.denninger.net/