Prepare NOW: They "Get It"
Courtesy of Karl Denninger at The Market Ticker
Anyone who doesn’t believe that "they" (the powers that be) "get it" at this point needs to remove their head from their ass:
G-20 central bankers and finance ministers agreed in a joint statement today that “within their capacity, countries will expand domestic sources of growth.” At the same time, European Central Bank President Jean-Claude Trichet told reporters that Europe’s best contribution to the global rebound is to achieve fiscal sustainability.
Those two are polar opposites. You just heard Trichet admit that what everyone wants they cannot have.
Look folks, if you currently spend 11% of GDP by borrowing money and blowing into the economy to prop it up and you achieve "fiscal sustainability" (defined as not doing that any more) GDP will inevitably contract by the amount of stimulative borrowing you withdraw.
Geithner said at a press briefing today that “credible commitments to fiscal sustainability over the medium term” are needed to generate a durable recovery. Spain’s Finance Minister Elena Salgado said at a separate European press briefing that deficit reduction should come “no later than 2011.”
Game’s up folks – that’s six months out.
Let’s be straight with everyone here. These are the current deficit additions for the first five months of 2010 (click for a larger copy):
That’s nearly $700 billion in five months. Annualized it’s $1.68 trillion. Last year’s total was $1.647 trillion.
Ignore the CBO and other government claims. That which is borrowed is that which is owed, and the increase in that which is owed over a year’s time is the true deficit in the budget, irrespective of all claims otherwise.
This comes out to roughly 12% of GDP. If we contract that deficit spending in 2011 to the European standard of no more than 3% of GDP then either GDP contracts by the difference (8-9%) or the government extracts that from you in the form of taxes.
Either way you don’t have it – it is either not produced and thus not paid or it is produced and stolen. Irrespective of how it is achieved you are going to see roughly 10% of your "standard of living" come out of your hide.
It would be nice if it stopped there, but it both won’t and can’t. That which you don’t have you can’t spend, which means that the "excess capacity" in the economy goes up, not down. Employment will not increase, it will stagnate or get worse. Budgets will have to be slashed at state, local and federal levels – like it or not.
Rather than you taking it in the chute what should happen is what I described in my last post – that is, the fraudsters and scammers in the banking and "finance" industry who sold you, and the nation, on the premise of ever-increasing debt being sustainable, should be the ones who are put out of business at the same time.
Unless we the people demand that this happen it of course will not. The consequences of such a refusal will be profound and extraordinarily unpleasant, while those who caused this mess by their intentional and willful acts will continue to keep their ill-gotten gains.
Remember one thing folks – political promises are not debts. They have no standing in the line other than the willingness and ability to fund them. When that disappears, and it will, you will discover that the so-called "promises" you were made have the value of used toilet paper.
This is unavoidable, and no amount of bleating will change it. I wish there was a solution to this problem, but there is not. The promises made cannot be kept, not due to lack of political will but inability to continue to compound debt upon debt upon debt any longer.
We entered this downturn because people could not pay the debts they owed. We are still in this mess because people still cannot pay. The government attempted to shift those debts to itself, and now it is in danger of being unable to pay.
The Federal Reserve Z1 will be out on the 10th, and I will be updating the charts showing total systemic debt on that day. I expect they will continue to show contraction, despite the efforts of government to stimulate credit demand and thus continue the expansion.
That is the end game that leads to the Mises-style "adjustment" and there is nothing that can be done to prevent it.
The government has spent two years trying to stop the contraction by replacing private credit demand with public. The attempt to re-ignite private credit growth has failed, exactly as I expected it to and have repeatedly stated it would here on these pages.
All that has happened is that governments have now started to be unable to meet their debt commitments – so instead of businesses (and banks) going under, we now have the risk of governments going under.
The idiots in Washington DC and indeed around the world refused to recognize that they are the gnat on the horse’s ass. If you look at the above chart you can see it clearly – Federal Debt is a small fraction of the total in the system. It is therefore mathematically impossible for The Federal Government to supplant and replace private credit demand and ability to pay. Something that is 20% of the whole cannot support the whole – it’s that simple.
The sustainable long-run percentage of debt in the system is about half of what is now present. If we were to shrink "financial instruments" and "non-financial business credit" by 60% and household credit by about half we’d be in the upper part of the sustainable range.
That’s where we’re headed – whether we like it or not – as the government is reaching the end of its ability to prop this thing up.
The knock-on effects to GDP that will engender will be hideous. Just to go back to 2000’s GDP would knock forty percent off. To return to a sustainable debt ratio on a $10 trillion GDP would require us to contract credit outstanding by some 55% – and that would put us at the top of the range.
I said when I began writing The Ticker that had we taken our medicine in 2001 we would have had to suffer a mild Depression – a 10-12% correction to GDP. In 2007, we would have had to suffer a 20% correction to GDP – roughly equivalent to The Great Depression of the 1930s.
I also said that if the government did what they’ve now done, the damage could easily be twice that bad, with a potential 40% decline in GDP in the cards.
Is there a guarantee that things will get that bad? No. But is it entirely possible? Yes, and if you believe not and want to expound on that in public you need to explain how your scenario can come about, given the clear mathematical evidence.
Excellent! You have put The Big Picture in terms that I believe anyone should be able to understand. I started telling people that everything they were hearing as the presidential election process started was nothing but crap, it will not work in1998. Check some of my posts on Phil’s site since last week. There is more than one who question my market unraveling theory and many on my theories concerning Apple. They will disagree but the new iphone 4 release today proves they have lost their grip and the balance sheet will follow. I sold out 2 months ago. Thanks and I look forward to hearing more from you.