Karl Denninger, "Moral Hazard --> Mortal Hazard"

"Moral Hazard --> Mortal Hazard"

by Karl Denninger

"Kick the can"; "Quantitative easing"; "Bail 'em out"; "The system needs the taxpayer to help it." "The Greeks have rendered their verdict on this sort of thing with molotov cocktails, murder and mayhem. Let's take a critical view of this: Was it murder and mayhem, or was it justified violence? Wait a second: All violence is not justified, right? Well, no. If someone kicks your door in at 3:00 AM intending to rape your wife, and you shoot them, that's certainly violence. But most people would call it justified violence - that is, lawful self-defense. On the other hand if you're walking peaceably down the street, someone decides they want your wallet, and they proceed to mug you, that's clearly criminal violence - even if the person doing the mugging is dead broke and starving.

This is a bit more complicated. The Greeks have had decades of ever-increasing entitlement. The government has conspired with private parties, most particularly the largest and most-powerful banking interests in the world, with the intent (and execution) of falsely misrepresenting fiscal health. The ECB and rest of the Europeans intentionally went along with what they had to know was radically cooked books. Having habituated the economy to the government spending money it didn't have, just like a heroin junkie when the drugs stop flowing the response was not something suitable for polite company.

The lesson contained within this sad episode is that we have committed the same sins here in America, as have other nations around the world. Repeatedly we have believed that the solution to too much debt is more debt. The merchants of that debt have become entrenched and privileged within our governments, and have bent the ear of politicians (either through persuasion or outright bribery of various sorts) in furtherance of their schemes.

The last time we had a positive economic environment was 2000. The 1990s in fact, despite the fraud and games in the Internet sector, grew quickly enough that the government was able to essentially withdraw stimulative efforts entirely. Productivity and economic output grew quickly enough to displace the government's efforts from the previous recession. But if you notice on that graph above after the 2000 recession the government never pulled back from the spending. The so-called "recovery" was in fact false. We never went materially under 4% of GDP from 2002 onward, and as such when the 2007 blowup started the government had no room to maneuver, as is shown by what happened in 2008/2009.

Greece is said to be asking for a program that will reduce everyone's standard of living by about 20%. If we withdraw the artificial supports our embedded structural distortion to GDP is slightly over 50% (!) from the last decade. Not all of this would disappear if we were to withdraw the "borrow and spend", but a lot of it would. That is, our $14 trillion GDP isn't really $14 trillion, it's closer to $11 trillion when one only counts private demand.

We, like the Greeks, have habituated the economy and people to this unsustainable federal spending. Social Security, Medicare and Medicaid, along with the solid-gold salaries and pensions in the public sector simply can't be sustained. It doesn't matter if people want it to be or not. Math IS. We may still choose to do what needs to be done voluntarily before it is imposed on us. We can force those banking institutions to eat their own cooking. We can expel those in government who were part of the web of scams and fraud from government and take our nation back - peacefully.

We can force the large financials to mark to market - for everything. We can force all assets back onto balance sheets, and ban by law, with criminal felony penalties, all gaming attempts through "off sheet" vehicles. We can reverse with the stroke of a pen the CFTC override on state gaming laws that made naked Credit Default Swaps a monstrous casino with no social utility. And we can demand that any attempt to game claimed asset valuations by claiming non-performing loans are "money good", as is going on right now with homes where people haven't made a payment in 2+ years yet their first and HELOC are carried at above recovery value, result in criminal prosecution for bank fraud. Fannie and Freddy's hidden gameplaying, which has now cost in losses over two years more than they earned in the previous 30, will end.

Doing so will cause a number of large financial institutions to either disintegrate into their constituent parts, with some worth zero and bond and shareholders getting severely haircut, or if they resist, they will fail. Home prices will fall to the point where they are truly affordable nationwide, perhaps to as low as 2x incomes on average. The average family that decides to live in an austere fashion and save will be able to buy for cash within a decade's time. The use of credit and "asset extraction" games as a lifestyle choice will end. Removing The Bezzle out of the system will also turn force governments to live within its means, as will the people. Schools will teach 3Rs instead of installing video games for so-called "physical education", public pensions will be slashed and despite the whining, adjustments will be made - because they have to be.

Yes, austerity sucks. But voluntary austerity can be peaceful, even if it's painful. Externally-imposed austerity at best usually leads to civil unrest and can result in civil war. Should the Greek situation result in the police flipping to the side of the demonstrators, they will lose their government. It's that close folks. Right here, right now, and "in your face."

There are schools closing right now, today, due to being out of money. That's right - a month early the kids are going home. Los Angelas is just about broke, Illinois hasn't been paying Medicaid bills (or anyone else for that matter) and dozens of other state and local governments are pretending to be solvent and a "going concern" when they are not - usually by failing to pay vendors for extended periods of time.

We are, right here and right now, in America, on the edge of what is happening in Greece. I know you're not being told this on ToutTV, but it is nonetheless true. Look around you; Illinois cannot even buy ammunition from some vendors for their State Police because they haven't paid their suppliers, who are now in turn refusing orders.

"Kick the can" is both intellectually dishonest and economically bankrupt. It has a finite life beyond which it causes destruction instead of (even temporary) redemption or reprieve. We must stop it now and accept the austerity that must come lest what we now see in Greece come to visit our shores in the coming months and years. The time for game-playing and clown-car politics has passed; this is a serious time for serious people, not "funtime pumpers" in Washington and on ToutTV."

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

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