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Denninger On The Money Again

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Denninger: debt is the problem

Morning Madness: Economic Fundamentals

Perusing the net and "mainstream media" over the last few months I have been stunned by the lack of focus on the simple, yet the essential, in what makes the economy, and ultimately the capital markets, move.

Indeed this morning CNBC has Steve Forbes on and their "banner" under it was "Seeking Stimulus."

Nobody in the media is talking about the rather simple math of the matter, which is most unfortunate, because if they did, there would be none of this "green shoot" nonsense.

Further, if Congress paid attention to the basic economic facts we'd be having a very different discussion in terms of political activity related to the economy as well.

Let's take the basics: We had a $14 trillion economic (GDP) in 2008, of which 70% is consumer spending. The rest is government and exports.

The consumer has spent two decades pulling forward demand via credit - that is, through the chimera of extracting home equity and charging up the credit cards. After the 1981 recession this really started to accelerate; prior to that point most Americans lived largely off their paychecks, rather than pulling out the "magic plastic card" any time they wanted to buy something. Checks were common as was good old-fashioned cash.

In 1981, US GDP was $3.1 trillion dollars.

In 1992 it was $6.3 trillion, a double.

In 2005 it was $12.4 trillion dollars, another double.

Doubling in roughly 12-13 years. Not bad, right?

Let's look at it a different way, this time in "current" (not inflation-adjusted, since GDP isn't) dollars.

In 1981 the per-capita income in the US was $8,476.

In 1992 it was $14,847, a 75% gain.

In 2005 it was $25,036, a 69% gain.

Notice anything? Its not really that subtle, is it?

GDP slightly more than doubled in each of those above periods, but per-capita income lagged, and the lag rate is increasing. How's that possible, since consumer spending is 70% of GDP?

Similar picture over here with GDP growth exaggerated by MEWings and the debt binge...

DEBT is the problem. Trying to reheat the consumer spending soufflé will not heal the UK's economic woes.

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They'll just have to pull their finger out and print the debt burden away.

Worthless currency and inflation, lovely.

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Worthless currency and inflation, lovely.

Oh it'll never be worthless. That nice Adam Shaw said so on Radio 4 this morning. He's a business journalist you know.

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There is only one way to re-base the economy and get it to grow on a sustainable basis: Consumption must be paid for by current income and some fraction of current income must in addition be put into capital formation.

There are only two ways to get there:

1. We can withdraw all of the political support for the lying that has allowed this debt to accumulate in the first place, calling it what it is: accounting fraud. This will in turn force massive bankruptcies to take place among both individuals and financial firms. Once that process is complete we will have cleared the excessive debt from the system and the economy can then grow organically as a consequence of productivity gains and production, with those who were imprudent appropriately punished by the free market, and those who were prudent rewarded by it.

2. We can continue to allow those who made imprudent loans to lie about the value of these "assets". There will be no sustainable economic growth so long as the excess debt load remains. There is a high probability that at some point we will enter a "death-spiral" where interest expense exceeds excess income at which point we will literally suffer an economic collapse, and there is absolutely no way to determine exactly where the "tipping point" is. A foreign creditor could trigger such a collapse at any time were they to withdraw their support of Treasuries, for example, either as a consequence of a choice or an economic crisis at home that forces them to stop buying.

Those are the only two choices folks. The math is never wrong and it is crystal clear. That every politician and media channel is not spending every spare minute talking about this is criminal malfeasance and a massive fraud being perpetuated upon the public.

The Fed's and The Administration's (both past and current) programs have not and will not work because the underlying cause isn't that consumers aren't "stimulated" enough or that "money (credit) is too tight." The underlying cause of our economic malaise is that we have cheated on a math test for more than 20 years and the teacher - the cold, hard facts of mathematical law, has caught up with us.

No amount of fancy arm-waving or "financial engineering" changes any of the above - it can't. The fact of the matter is that your real standard of living, as defined by per-capita income compared to GDP, has decreased by approximately 30% in the last 20 years.

This is why we now have virtually every family "needing" to have two people working, it is why we continue to play the "credit roulette" game, and it is why we are teetering on the edge of the economic abyss, irrespective of the so-called "green shoot" crowd.

If we continue to attempt to play this game we will tip over the edge where interest compounded upon interest will rise in a parabolic blow-off, economically destroying literally everyone who is in debt, including our political system, as our federal government is one of the worst offenders of all.

We came close to that point last September, and the actions of our government thus far have made the situation worse, not better. There is no path forward that involves taking on yet more debt or shifting debt around - all solutions that can actually work require that debt be either paid down or defaulted.

He's ignoring the obvious point if there has been a paradigm shift and debt is wealth, then the only way forward is to increase debt.

This is a game of chicken and we are going to find out who's right, if debt is wealth everything will be fine, if it's not we're screwed and it's a game the politicians are prepared to play.

Debt is the problem and so far no one in the media is really prepared to discuss it.

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Debt is the problem and so far no one in the media is really prepared to discuss it.

You are right of course.

Over on the home page there is a link to an FT article

FT: Time to tackle the real evil: too much debt (via HPC)

It is unfortunate for us all that the same politicians and bankers, who like seedy drug pushers, took us down this debt-lined road, are the very same ones trying to fix the problems with 'more of the same'.

Will the media and the population in general wake up?

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He's ignoring the obvious point if there has been a paradigm shift and debt is wealth, then the only way forward is to increase debt.

This is a game of chicken and we are going to find out who's right, if debt is wealth everything will be fine, if it's not we're screwed and it's a game the politicians are prepared to play.

Debt is the problem and so far no one in the media is really prepared to discuss it.

Which paradigm is closer to reality? I mean, I assume we are still talking about reality these days. :rolleyes:

I suspect we shall soon find out.

Edited by roman holiday

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Which paradigm is closer to reality? I mean, I assume we are still talking about reality these days. :rolleyes:

I suspect we shall soon find out.

That depends if we are in the presence of an economic genius like Ponzi Brown who fully understands the new paradigm of debt is wealth.

If La La Land actually exists then debt is wealth and it's time to start buying.

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Denniger says

The metalheads all claim that we'll "inflate it away", never mind that attempting to do so just makes the math above worse, not better.

Nonsense.

There is only one way to re-base the economy and get it to grow on a sustainable basis: Consumption must be paid for by current income and some fraction of current income must in addition be put into capital formation.

Why does inflating debt away not work? Is it because it transfers wealth from savers to debtors without actually increasing overall wealth???

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Why does inflating debt away not work? Is it because it transfers wealth from savers to debtors without actually increasing overall wealth???

It would also reward all the malinvestment and fraud and encourage more.

So the real economy would just get weaker and weaker.

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Why does inflating debt away not work? Is it because it transfers wealth from savers to debtors without actually increasing overall wealth???

You also have to consider that you end up with ever increasing perpetual debt. You could take ever increasing risks knowing that your debts will always shrink due them being inflated away. However this only works if workers get big pay increases. If that doesn't happen you can't inflate the debt away.

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You also have to consider that you end up with ever increasing perpetual debt. You could take ever increasing risks knowing that your debts will always shrink due them being inflated away. However this only works if workers get big pay increases. If that doesn't happen you can't inflate the debt away.

But for the last couple of decades the exact opposite has happened.

Wages pegged to a fraudulent 'CPI' while costs of things like a roof over your head or electricity or food have increased enormously.

How exactly do Americans/Europeans get huge page increases in the next few years without abandoning globalisation and nuking China/India?

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But for the last couple of decades the exact opposite has happened.

Wages pegged to a fraudulent 'CPI' while costs of things like a roof over your head or electricity or food have increased enormously.

How exactly do Americans/Europeans get huge page increases in the next few years without abandoning globalisation and nuking China/India?

We can all work for goldman sachs.

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You also have to consider that you end up with ever increasing perpetual debt. You could take ever increasing risks knowing that your debts will always shrink due them being inflated away. However this only works if workers get big pay increases. If that doesn't happen you can't inflate the debt away.

But surely if the government doubles the money supply by printing, prices double, wages double, debts halve in real terms and savings halve in real terms.

Savers shafted, debtors bailed, everything else OK???

What have I missed????

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But surely if the government doubles the money supply by printing, prices double, wages double, debts halve in real terms and savings halve in real terms.

Savers shafted, debtors bailed, everything else OK???

What have I missed????

Hyperinflation, which destroy investment etc... just as deflation does.

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But surely if the government doubles the money supply by printing, prices double, wages double, debts halve in real terms and savings halve in real terms.

Savers shafted, debtors bailed, everything else OK???

What have I missed????

Foreign investors run a mile, dumping the pound/treasuries etc. The pound drops like a stone, imports become very expensive, we are all worse off. Interest rates go up, wiping out millions. Unemployment would go up even further. The cost of servicing our national debt goes up in proportion to our GDP, meaning higher taxes. overall productivity would plummet and we would become a basket case. We are not that far from this now IMO. Not sure about the yanks, but it seems pretty grim.

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But surely if the government doubles the money supply by printing, prices double, wages double, debts halve in real terms and savings halve in real terms.

Savers shafted, debtors bailed, everything else OK???

What have I missed????

Wages, or the price of labour, the only card the working man has to play, have been globalised.

Hence we are trapped in a prison, and we have no means of negotiating a comfortable stay. When the wages of the starving in Africa are high, and ours are "a dollar a day", jobs may return.

Forget wage inflation.

Nick

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Foreign investors run a mile, dumping the pound/treasuries etc. The pound drops like a stone, imports become very expensive, we are all worse off. Interest rates go up, wiping out millions. Unemployment would go up even further. The cost of servicing our national debt goes up in proportion to our GDP, meaning higher taxes. overall productivity would plummet and we would become a basket case. We are not that far from this now IMO. Not sure about the yanks, but it seems pretty grim.

It's coming. Next week? Next month? Next year? Maybe we'll wing it more another 3, 5 or even 10 years, who knows? But it's coming.

Hopefully sooner rather than later too, cos I'm up to the hilt in precious metals and want to pick up my big pay out asap, while I watch the irresponsible greedy debtors who helped created this mess burn! :ph34r:

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It's coming. Next week? Next month? Next year? Maybe we'll wing it more another 3, 5 or even 10 years, who knows? But it's coming.

Hopefully sooner rather than later too, cos I'm up to the hilt in precious metals and want to pick up my big pay out asap, while I watch the irresponsible greedy debtors who helped created this mess burn! :ph34r:

moi aussi

hat tip to the great Cgnao for educating me,

the logic and the maths of this make the outcome 100% gauranteed.

orgasmatron

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But surely if the government doubles the money supply by printing, prices double, wages double, debts halve in real terms and savings halve in real terms.

Savers shafted, debtors bailed, everything else OK???

What have I missed????

Nothing! Logic is all that is required. Forget the real world. :rolleyes:

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But surely if the government doubles the money supply by printing, prices double, wages double, debts halve in real terms and savings halve in real terms.

Savers shafted, debtors bailed, everything else OK???

What have I missed????

Government debt doubles, and we have to pay taxes to fund it.

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