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2019-07-27 07:00 by Karl Denninger
in Macro Factors , 254 references
[Comments enabled]  

This garbage is just flat-out ridiculous:

I earn my living investing other people’s money in the stock market. I am terrified contemplating how I am going to save my clients’ money, as well as my own, if a Democrat is elected president. The policies that the Democrats are advocating will destroy the American economy, not just the stock market, but the whole US economy. My first instinct will be to raise cash ahead of the stock market crash, but even that is only a temporary safe harbor.

The Green New Deal, renewed regulations, Medicare for All, free college,  as well as the 70-90% tax rates proposed by Democrats, will tank the stock market and US economic growth, leading to higher unemployment and reduced wage gains. All these programs require higher taxes and not just the soak the rich fantasy of the 70-90% rates. Most of the Democratic candidates have pledged to roll back the 2017 Republican tax cuts that fueled the renewal of economic growth in the US.

All of this is true.

But it's irrelevant.

As I've pointed out for more than a decade by 2024 CMS -- that's Medicare and Medicaid -- are incapable of the shenanigans that they use to suppress their budgetary deficit impact.  This is not rocket science, it's arithmetic, exactly as is the so-called "doom dates" on Social Security.

But Social Security's "doom dates" are in fact rather minor.  Being able to pay 80% of a promised benefit (that is, you're running a ~20% fiscal deficit which is consuming assets) is sort of ugly, but that's fixable.  Nobody's going to like a 20% tax increase on FICA (7.65% of wages up to the cap, plus another half you don't see) but raising the cap, increasing that tax by 20% or some combination that gets to the same place resolves the problem.

That's not catastrophic.  Nor, for most people, is a 20% reduction in payments, although the howling (and election losses) that result from the latter guarantees that won't be the outcome.  Those tax changes will and can be made and will not result in a collapse of the economy.

However, CMS is not running a 20% fiscal deficit; in their case roughly one dollar in five is covered, not four dollars in five!  When they run out of that stoked-back powder there are two choices, and only two choices:

1. Essentially default in its entirety on the promises made to Medicare recipients, both current and forward, forever.  This will simply cost-shift basically all of that onto Medicaid, particularly with regard to nursing home care once you bankrupt the vast majority of Medicare (retired) people, which will happen almost instantly.

OR

2. Congress changes the law so as to permit CMS to run without backing, that is, the entirety of their operating deficit shows up on the federal budget as a fiscal deficit.

Social Security and Medicare are currently prohibited by law from doing #2.  Congress will have no choice but to permit #2 for at least Medicare, and since utterly nobody in the political or news space de-aggregates these two programs when talking about "fiscal cliffs" even though they have radically different exposures and funding problems the pressure to do it for both in the same bill will be overwhelming.

Not that it really matters; #2 will roughly double the federal deficit on an essentially immediate and permanent forward basis.

The "big lie" is this:

Whatever you think of President Trump, you know by his record that he will put America first and that his policies have created a robust economy. Unless you want to see the US economy and your standard of life destroyed, there is no alternative to voting for President Trump.

No, he has not.

The GDP data is here.

It shows a 4% gross GDP advance over the last 12 months (to Q2/2019.)

Debt to the penny shows a 3.91% fiscal deficit as percentage of GDP over the same period of time.

In other words there is no "robust economy" at all; it's a lie.

Actual GDP expansion in real terms over the last 12 months is 0.09%!

Statistically-speaking that's zero.

These are not my numbers and not my assertions; they're the government's figures and they're widely-regarded as facts.  Trump's most-recent "budget deal", which he is advocating for, has passed the House and will almost-certainly pass the Senate and be signed into law will remove all fiscal rectitude until the middle of 2021 by suspending the debt ceiling entirely.

Again, I remind you, by 2024 on current trajectories that roughly trillion dollar deficit ($828 billion on a rolling 12 month basis at present, and accelerating) will permanently double.

Yes, GDP will go up, since every dollar of that deficit will be immediately spent.  That's how borrowing works; you borrow money and you spend it, and as soon as you spend it GDP increases.  That's basic math and economics.

However, diluting the currency as a means of "goosing" GDP doesn't actually advance anything in terms of actual economic output.  Worse, productivity, if you believe the BLS, is "advancing" at 3.4% annually as of the last read.  This is, paradoxically, very negative in light of the fiscal deficit because "doing more with less", which is the definition of productivity, means that GDP should be running at least at that level on a fiscally-adjusted basis!

In other words if you include productivity, and for honest numbers you have to, the US is currently in a deep recession as it is in fact contracting real output on a roughly 3.3% annual rate.

How is this possible given "full employment" and the stock market soaring?

It's not hard to figure out; it's happening the same way you're "just fine" if you make $100,000 a year but continually add another $4,000 a year to your credit card balances.  That $4,000 is quite a lift in your standard of living.  It allows your family of four "another" week-long cruise per year, for example, or a very nice trip to Disney, or, for that matter, more than half of the monthly payments on a brand new $50,000 "loaded" pickup truck or Lexus.  Note that if every family did this GDP would increase at that same 4% since you're all spending 4% more than you make and the gross output will thus lift by that same 4%.  The (obvious, to anyone with more than two firing neurons in their brain) problem is that you're not really gaining any prosperity at all; in fact you're going backwards as you're accumulating an obligation that at least has an interest expense and at least in theory eventually must be paid off!

This illusion of "prosperity" can continue for a very long time -- so long as your credit card company doesn't call the loan, or even just shut off the spigot and deny any more charges. But even if just the latter happens not only does that $4,000 a year of "spending" disappear the interest payments do not disappear, and since you can't afford to pay down any of the principle those interest costs go on forevermore into the future.

Again -- as things stand right now we're consuming our capital base at a roughly 3% annual rate.  That depletion rate is set to double within the next five years.

I do not know when the markets will wrap their arms around this just like I don't know when you as a family would if you were running up your credit card on those Disney vacations.  But I do know that the day when it happens will come.  Not might, not could, will.

The willful and intentional denial of this fact by you, Greenwald, along with the others drum-beating for the flying-hair monster currently in office will simply make it worse when it does happen.  After all a market crash from DOW 27,000 to DOW 5,000 is very, very bad.  But one from DOW 35,000 to 5,000 is demonstrably worse because more and more people will believe that the so-called "value" in those assets is not only real but theirs to consume over the coming years when in fact it is not.  How many of those people have a half-million dollar "retirement fund" that is, in fact, really a $50,000 one?

What really galls me, however, is so-called "money managers" like the cited one in this quoted article, who believe that (1) this "prosperity" is real despite the data saying its not being literally in their face, (2) Trump is responsible for it and (3) voting for Democrats will be a disaster while not doing so will continue the "prosperity."

The root problem is that there is no prosperity in the first place; it's a chimera and fraud writ large and has been the case and policy of both parties since approximately 2000, when the accumulation of federal debt crossed the zero boundary and began resulting in negative contribution to GDP.

This is an exponential series.  Like all exponential series the negative impact starts slowly and thus the "belly" in the curve from the two lines on the chart for a while expands.  Yes, the top-line (debt) is accelerating but the imposed cost starts at a lower level and thus there's more "gap" between the two curves for a while.

But arithmetic tells us that exponents always behave exactly the same way.  That the appearing-safe "belly" will disappear, the gap will close and when it does you have a catastrophe because you can't cover the expense.  There is nothing you can do about it other than to halt the excessive spending and pay down the outstanding balance, but this requires not just halting the excessive spending (that is, cutting it to income levels) but going even further in order to pay off some of the outstanding balance.

At present the Federal Government is spending approximately 25% more than it takes in from all taxes combined.  To halt the detonation the spending cuts must therefore be more than 25% in total, now and forevermore into the future.  Everyone in DC has a wipe-out, toddler-style screamfest if you propose not spending more every single year yet the corrective action required is for one quarter of all money spent today be whacked off the budget.  That's how far down the rabbit hole we've gone, all without a single whimper of revolt or refusal to consent by the public at-large.

The mantra for the last 30+ years is that we're "leaving this mess to our kids and grand-kids", implying that we're saddling those who either cannot yet vote or worse, aren't yet born.  That was true 30 years ago,  It was probably true 20 years ago, as the generation just being born then would become adults about...... now.

But today it's no longer true.  We're not leaving anything to anyone.  The problem is here, it's ours, and we either stop it now or it will blow up in our faces.  Five years is a very short period of time to make fiscal adjustments and allow the economy to adjust and come back into balance.  Trying to eke out another 10, 20, or even 50% in stock prices over the next five years is not only unwise it's literally suicidal on a national basis and those advocating for same deserve to be held to account when, not if, their continued drum-beating for a fiscally, economically, politically, morally and ethically bankrupt position results in mortality.  One can only hope it's their progeny, spouses and then theirs personally, in that order first.  Sadly while I can hope and pray for them to be first it will not be only them no matter who goes first; the count of ordinary people who will be utterly destroyed and likely die is going to reach all the way from top to bottom with those at the bottom bearing the greatest percentage of losses.

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Sigh.....

How do you fail middle-school math and wind up on TV, in academia or arguing for a policy that is demonstrably economically bankrupt?

Let's do this again:

 

This is all government data.  It shows the nominal reported GDP expansion (blue line), the federal debt addition (deficit spending) as a percentage of GDP, and the arithmetic subtraction of the two, which is actual GDP expansion.

Except there hasn't been any of material importance since the 2000 tech wreck.

Years ago I printed an article in which one of the source pieces was a chart showing the declining beneficial impact of new debt taken on.  It was a "best fit" declining slope with a zero intercept.

When debt accumulation begins in an economy you get more than one dollar of economic activity for each dollar of debt taken on.  This is one of those intuitive things; you have a dollar of debt, you buy a dollar of product, but in order to make it a bunch of people have to touch it from raw material forward, and all the activity involved in making the "thing" means that for one dollar of borrowing you get more than a dollar of economic activity.  Thus, at the beginning, more debt means faster economic growth.

But once you cross that zero intercept new debt harms you.

That is, if you take on a new dollar of debt you don't get a dollar of economic activity out of it; you get less than a dollar and yet you still owe the dollar, plus interest.

That's a trap and once in it you're in a lot of trouble.  It is akin to digging a hole while standing in the center.  Not long after you start, assuming you have a means to get the dirt out, you find you're in over your head and then over the reach of your arms.  At this point you're screwed; absent outside help you can't get out!

We crossed the negative influence point approximately coincident with the tech crash in 2000 and since that time we have not only refused to stop the deficit spending every incident has brought forward more of it.

Yet it is a fact that we're now getting less than a dollar of new economic activity for a dollar of new debt and this has been, almost without exception, true since 2000.

The trend is in fact accelerating; if we did not spend that new federal borrowing last year the nominal GDP print would have been negative.

If you have a copy of Leverage (look to the right) the chart that shows you what happens is on Page 26.  This isn't politics, it's math and always happens.  The negative contribution not only gets worse but if you keep it up eventually the accumulation of debt consumes all of output and there's nothing left to do other things with -- like buy aircraft carriers, pay government employees and cover Medicare benefits.

In short for a stable economy the following must be true:

1. The Federal Government must not run a fiscal deficit as a percentage of GDP that is larger than the expansion rate of GDP.  If you have a 3% GDP nominal growth rate the fiscal deficit must be smaller than that as a percentage of the economy.

AND

2. Monetary policy must not permit short-term interest rates to be less than the nominal GDP expansion rate.

Since governments love to provide stimulus when the economy sags inevitably some short-term violations of these rules will happen.  But when they become policy rather than exception you're in trouble.

Even these two conditions, obviously, do not prevent debt accumulation -- but they do prevent said accumulation from turning into a negative-sum game.  If deficit spending is practiced over a long enough period of time these rules will force said deficits to zero and in fact into surplus because that zero-crossing point will happen if you continually borrow more and more money.

Failure to follow both of these rules results in a charade that can continue for quite a long time -- but it cannot continue forever.  The Fed can play games with interest rates and asset purchases to enable continued federal deficit spending but it does not, because it cannot, control the economic outcome that results.  Japan dug itself deep into this hole and has never been able to exit it since its crash.  China puts out flat-false (intentionally so) economic data so as to confuse people but their debt is running at some 300% of GDP, which is ridiculously beyond the point at which negative contribution is made.  As that negative contribution has shown up they've put more and more monetary and fiscal distortion in.

The premise that we can keep doing this on a forward indefinite basis, and thereby you should buy stawks because, if nothing else, we're the best house in a crappy neighborhood holds no water as the underlying economic premise is mathematically bankrupt.  A negative real rate of return for borrowing money is negative no matter whether you're the best or worst of the bunch and when you're down to paying your food bill with a credit card because you have no free cash flow you are not all that far from going bankrupt, being evicted into the street and becoming the next crazy dude living in a refrigerator box.

Last year the Federal Government spent $4,108 billion dollars.  It ran a $779 billion deficit on a cash basis, not counting the Social Security and Medicare scammed funds.  That's roughly one dollar in five that was not collected from taxes; it was instead borrowed.  This year it appears we may approach one dollar in four!

There is a point where this will fold back on us.  I've long argued that the salient point where it happens occurs when CMS (Medicare and Medicaid) cannot cover their funding from bond redemption and tax collections.  As a reminder, Medicaid has no tax base behind it; that is a pure give-away program.  Medicare is allegedly funded by tax collections during one's working life but the medical SCAM has turned it into an outrageous extortion racket that collects five times the market price on an average basis across the entire economy.

My best guess -- for more than a decade now -- is that this "knee point" arrives by 2024.  Back in the 1990s when I was running MCSNet I calculated that this "knee point" was likely to arrive somewhere between 2025 and 2030.  Nobody cared then because it looked so far off.  Well, "so far off" is now here and yet we've habituated the American public to more and more spending while simply running the credit card up higher and higher.  This will not continue forever because it can't. It's entirely plausible that if we get a recession by 2024 the Federal Government won't be running a 25% fiscal deficit it will try to run a 60% fiscal deficit!

Trump, in the 2016 campaign, correctly called this an "ugly bubble."  The moment he was elected he changed his tune and intentionally blew a bigger one.  He's a fraud folks; he didn't change his mind.  He does not care; just like Obama he thinks he'll be out of office before it blows up and thus he does not give a wet crap if you, your children and grandchildren literally have to live through a civil war or revolution as a direct result of his self-aggrandizing economic nonsense.

He will get on his private jet.

You will die.

If you think that corporate profits and therefore stocks will do nicely -- and not be cut by 80% or more when this point arrives you have rocks in your head.  Ditto if you think jobs will be plentiful and so will your access to credit, on which most of Americans survive today.

Almost none of the alleged growth over the last 19 years has been real!

If you wish to believe that there are magical Unicorns and they crap out pretty colored candies, go right ahead.

The truth is that thing you're looking at is a horse, someone stuck a horn they fashioned out of some sort of material on its forehead with superglue and what's coming out the back end isn't candy, it's ****.

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2018-07-05 07:00 by Karl Denninger
in Macro Factors , 290 references
[Comments enabled]  

This man is flat-out nuts.

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

He goes on to argue that it's not China's fault -- it is the fault of our corporations, and thus we have to deal with "our" corporations.

Uh huh.

A business exists to make a profit.

Laws define what is legitimate to do in the pursuit of said profit, and what is not.

Millions of Americans lost their jobs because the law allowed their jobs to be offshored to literal slave-labor encampments without consequence.

And it is not just China.  In fact, China is just one of many offenders.

The results are plain. In Kuala Lumpur cranes stretch outward among the gleaming towers in a perpetual construction boom powered by foreign investment. The streets are spotless and well policed, the water is clean, and the politics are relatively stable. Consumers around the world benefit from products like mobile devices, circuit boards, and LED screens.

At the heart of this economic success are migrant workers. From Bangladesh, Nepal, the Philippines, Indonesia, and India, they arrive at Kuala Lumpur International Airport by the scoreful, papers in hand, hoping for a better life. Estimates of the number of foreign workers in Malaysia vary widely, from the government’s count of almost 1.8 million to perhaps twice as many, which would amount to a quarter of the country’s workforce. Migrant-worker advocates estimate one-third of those workers are undocumented.

Malaysia allows and prospers through what amounts to slave labor; in other words, modern-day human trafficking to obtain labor for pennies an hour.

This is nothing new; in fact it's as old as people.  Mexico was once one of the worst in this regard; they didn't give a crap about the health of their slaves or even their longevity; they had access to so many of them that there was no economic incentive to even feed their slaves.  In other words it was cheaper to buy a new slave than feed the one you have.  America's slavery, for all its warts, didn't devolve into that but it wasn't from the "caring" of the slave-owners -- it came from the economics.

Has it really changed?  Nope, nor will it ever except where the law forces it to.

This is why in my book Leverage I pointed out that the only way to deal with this crap and stop it is to apply Wage and Environmental parity tariffs without exception and to ensconce those in law for any firm that wants to do business in the United States, without exception.

PCR says this is the fault of the Fed.  Of course he does -- he doesn't want to deal with the fact that he, personally egged on the offshoring and "free trade" bull****, never mind his time in advocacy with the Hoover Institution, Georgetown, George Mason University, an associate editor for the Wall Street Journal (which has an unabashed record of promoting so-called "free trade") and, of course, Reagan's "supply side" economics which were little more than a sop to offshoring and exploitation of slavery.  Oh, and let's not forget his advisory role to J.P. Morgan!

It's not like the big banks had anything to do with this, right? smiley

Reagan had the distinction of running enormous deficits during his Presidency, which inflated GDP.  Everyone cheers for GDP increases but nobody in the media, nor Roberts himself, points out that mathematically GDP will always increase by the exact amount all branches of government combined spend in deficit, whether they allegedly issue "bonds" to "fund" that or not.

Nobody issues bonds or takes down a deficit for money they do not immediately use.  If your local district issues a $20 million bond for a school improvement it immediately spends the $20 million.  If they taxed the money from you first the net GDP impact would be zero -- you forfeit the $20 million to the school (which means you don't spend it) and then the school spends it.  $20 million minus $20 million is zero.

But if they can spend it first then they take nothing from you initially and GDP goes up by $20 million.

The problem is that theoretically they must take the $20 million later to pay off the bond but history says they never do. Instead the bond is rolled over and only the interest is paid, so the $20 million appears to be "free" in economic terms and thus GDP continues to go up when they issue the next one too.

It's not true in fact and what's worse is that the "extra money" flying around makes the price of everything go up.  Now if there was no turd-world slave labor there would be a check and balance on this that would come in the form of rapidly-rising wage demands (when you get to the point of being unable to feed yourself why go to work?) and that cuts off the game.

To prevent a replay of this after it happened during Nixon's administration (and interest rates were forced higher in response) PCR and the rest of the "free market" screamers passed law and policy to make it both legal and trivially easy to find a source of slaves to replace those pesky people in America who would otherwise demand more money to keep making both cars and computers.  They are also the same people who insist that illegal Mexicans be allowed to flood the nation to pick oranges, strawberries and roof houses.

It's not that Americans can't do those jobs it's that you can't ask Americans to do so them for $3/hour and expect them to be able to survive.  The price of a house or strawberry package would skyrocket immediately and cut off the unbacked credit issuance.

In other words it's all fraud and PCR knows it.

But this is what passes for "economic wisdom" these days, never mind "reporting."

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