The Wrong Diagnosis

I post my thoughts and insights about breaking news items and other findings every day of the week, and often on weekends too, in a forum area for enrolled members.  Below is my first post of the day, which I thought would provide a good example of what's happening over on that part of the site.

Mr Practical, who posts his keen insights at minyanville.com, has this nice summary and diagnosis of the current situation (which I happen to share 100%):

If you add up all the government bailouts, explicit and implicit, along with actual government purchases of assets (debt from banks) it comes out to a surreal $30 trillion. Markets are cheering that things have “stabilized” and “things are getting less bad”. I ask you seriously when the government throws $30 trillion at the “crisis” (one which bankers are now claiming is over), can you call that stable? That is like declaring a patient being kept alive on a heart-lung machine healthy.

Of course we have stabilized. The government has bankrupted our future to do it. The government(s) control the LIBOR market, the swaps market, the bond markets with all the “money” they are printing. They are feeding “money” to banks under the table at an alarming rate.

Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.

The key issues are best examined at the most macro level these days.  If they do not make sense in total, then they do not make sense individually.

Does it make sense that a crisis rooted in debt can be solved with more debt?  If not, then you can safely ignore the details of the TASF, TALF, PPIP, et al., unless you are interested in tracking the theft and looting of public monies by insiders.  Then there is good sport to be had in the details.

Mr Practical continues:

Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it.

Right there, Mr Practical has named the very root of the predicament we face:  Growth comes from new spending, and new spending comes from new credit, and new credit represents more debt.  That, for better or worse, is our system.  Said another way, every dollar is loaned into existence. All money is debt.

As pointed out in the Crash Course, this means there is a problem baked right into the very system itself, because it is not possible for debt to increase exponentially forever.  Sooner or later it runs out of fuel (new borrowers, productive economy, or both) and then the system begins to unravel.  That's where we are today.

Jeff Nielson summarized this very nicely in an article in SeekingAlpha that was posted this morning.  He picks up on on one of the most-important yet least-appreciated facets of our current delusion (the fact that our GDP is padded with non-cash transactions - thank you, Jeff!) and builds towards the logical conclusion that we simply have too much debt.

As pointed out by Chris Martenson, in his own fantastic presentation, “The Crash Course”, roughly $2 TRILLION per year of supposed U.S. GDP is statistical “padding”. It is “deemed GDP”, where there are no dollars changing hands and no visible wealth being generated.

Strip away that padding along with the dramatic reduction in GDP caused by the Greater Depression, and we are left with a measly, $11 trillion/year in GDP. Please note that GDP is not the profits of an economy, merely an indication of economic activity.

Given that most U.S. debt is held by individuals and cooperations, and with long-term interest rates rapidly rising, just to service this insane mountain of debt will require something in excess of $3 TRILLION/year. This is more than 25% of annual GDP!

Obviously when more than ¼ of all economic activity is dedicated to simply paying interest on debt, then it is equally obvious that borrowing additional vast sums of money will simply make this ratio much worse. If this were not true, then no one would ever need to declare bankruptcy, they could just keep borrowing more and more and more – until eventually they “solved” their problem.

Is there anyone who still believes the Wall Street Liars, their servants in government, or the media-parrots, when they repeatedly assure one and all that increasing this debt far faster than at any time in history will “solve” the U.S.'s current economic nightmare?

The arithmetic cannot be contradicted. The “plan” of the Obama regime (and the Bush regime before that) is simply a guarantee of bankruptcy for the U.S. - with most likely a destructive episode of hyperinflation before the final, debt-implosion.

Where the US government and its Wall Street partners have decided that we suffer from a condition of too little spending, the alternative diagnosis says that we suffer from too much debt.  Given our debt-based monetary system, these are exactly diametrically opposed conclusions, and each implies solutions that are exactly in opposition to the other.

So if it turns out that we suffer from too much debt, and the wrong solution of MORE DEBT is applied, then we are making the situation worse, not better.  It would be the same as a drunk trying to drink himself sober.  

I hold the view that we are doing exactly that.  The crisis will only continue to get worse and surprise DC/Wall Street to the downside until we finally get a grip on what the actual problem is.  I am not holding my breath for that moment, as it could be a long time coming.

The hangover is going to be severe.