The Market Ticker by Karl Denninger

WARNING: Deflationary Collapse Dead Ahead

For those of you who prefer text......

You have heard me talk about this before.

I have written Tickers for more than two years.

I have sent multiple petitions to our Congress, and you have signed them.

I raised an unbelievable amount of Hell when TARP was under debate, arguing that we must allow those banks that are underwater to collapse and we must force the bad debt from the system.

The fact of the matter is that you have been lied to for the last decade about our economic state, and if we do not divert from the road we are on our economy, our monetary system and our government WILL COLLAPSE.

Not "might collapse."

Not "might get bad."

WILL COLLAPSE.

It is a mathematical certainty, and here is the proof.

First, I present the graph of our economy - GDP and Debt, from the 1950s onward.  This chart you've seen before (click any of these for a larger copy)

Now I want to present two charts - the first being a simple mathematical chart of two functions - a GDP that grows at 5% annually and debt that grows at the actual compound rate it has grown since 1953, 8.7946%.

I started both debt and GDP at the same value, $10,000, for the purpose of this series (even though in fact debt was higher than GDP.)

You'll notice that due to the fact the debt isn't a constant (and neither is GDP) these are not exact matches - but they're pretty close!

Now let's go forward 20 years, maintaining the same assumptions.  That is, if you and your wife or husband, boyfriend/girlfriend sleep together tonight and conceive a child, this is what our economy will look like in terms of debt and GDP at the approximate time they go to college:

You think so eh?  Debt outstanding will be six times greater in 20 years.  GDP will be three times greater, but having started from a much lower level, will of course continue to lag.

Do you really believe that those interest payments can be made?

Look at that chart.

Now look up above at the top chart.

That is reality right here, right now, today.

Tell me it doesn't turn into the bottom chart.

I didn't make these numbers up folks.  That compound annual debt growth rate is real.

More importantly, Geithner, Paulson, Bernanke, Bush, Obama: all have emphasized that "we must get more credit to consumers and businesses" as their primary mantra ever since this crisis began.

They are pressing this position because if we do not expand credit further the existing banks and other institutions that have bad debt on their books will collapse - and they know it.

The correct action to take in 2000 was to force the bad credit from the system and accept the impact on GDP.  It would have caused about a 10% contraction in GDP at that time - a mild Depression (or a really nasty recession, depending on how you count it.)

Now, having instead blown another credit bubble, we essentially doubled the debt in the system over the last ten years, while GDP grew by about 40%.

The result of this was a horrible stock market crash, 6.7 million jobs lost (and underreported), personal income tax receipts are down 21%, corporate tax receipts are down 58%, the deficit is tracking at $1.8 trillion this year alone (and $9 trillion more predicted over the next decade), government is now spending nearly 200% of taxes taken in, 13% of mortgages are either delinquent or in foreclosure, more than 20% of all FHA loans are delinquent or in foreclosure, home prices have fallen by half in many places and are not done declining and the rest of the world is wondering if we're going to try to hyperinflate and destroy our currency.

If we try to double our debt once again over the next ten years we won't make it there.  The available free cash flow cannot support the interest payments now, and won't be able to to if we add more debt to the system.

I understand the political difficulty of closing all the major banks in the United States, selling off their assets and making good on their deposits when required.  I recognize the damage this will do to pension funds and bond investors.  I am fully cognizant of the fact that this means taking an intentional depression here and now.

But if we don't it will in fact be worse later.

Not "might" be worse.

WILL be worse.

The odds are high that if we attempt to add more debt to the system, instead of clearing debt through defaults and bankruptcies, that we will precipitate not only a Depression but a full-on monetary collapse.

Such an outcome would destroy our economy, result in almost everyone who is currently middle class and has any debt whatsoever being rendered penniless, unemployment could easily reach 30% or more and the government would be unable to fund any of its social programs, including Social Security and Medicare.

Now think that through - 100 million homeless, penniless, angry Americans searching for the people responsible for what amounts to a "sudden stop" in the economy along with the cessation of all social assistance payments.  What sort of odds would you like on civil disorder (at best) or a revolution (at worst)?

I ask Congress: Is either of those possible outcomes an acceptable risk?  If not, then we cannot stay on the path you are following today.

We must take the right path.

Policymakers must have demanded of them an explanation for how they intend to get away from the simple laws of exponential growth when debt is 375% of GDP, has expanded faster than GDP and must continue to do so to avoid the deflationary outcome.  They will not be able to do so, as the mathematics render such an explanation impossible to provide.

In order to prevent the immediate creation of asset bubbles the interest rate charged must always be greater than the risk-free rate of return in the economy - that is, the growth rate.  Always.  Yet this guarantees, as a direct consequence of the laws of exponential growth, a fundamental mathematical concept, that debt defaults and thus "clearance" of the system, along with the contraction of GDP and the economy and failure of both lenders and borrowers, must occur on occasion in order to clear the system.  The longer you try to avoid these normal business cycles in any debt-based monetary system the worse the crashes are, and if you try to avoid them for too long you get a collapse instead.

This is basic, fundamental, sixth-grade math and that the leaders in this country refuse to accept it is an outrage against the people and an intentional act of deception that we must not allow to stand.

We are one cycle away from a collapse - if we're lucky.

We must change our economic course now and accept the contraction that MUST COME in order to save our economic and monetary system.

I will gladly take those worthless dollars since you aren't going to have any use for them anyway.

Not yet.

He said DEFLATION, not INFLATION...



Think George Bailey, and 'Mama & Papa Dollar'...



Not Wiemar Republic...



 

Obama's fault? Thats racist!!

I think they're going to pump to try to get out.  And blow it.

ETA: My post was more geared towards the worthless dollar comment than the order of the deflation/inflation fiasco we're in.

Does this mean ammo prices will drop?

And BTW, what the author of the article misses, is that the reason everyone 'in the know' says we need to restore the availability of credit...



Is that:



1) Money is not forever... It expires every time a loan is paid back, or defaulted on... Therefore, our money supply DEPENDS on continuing issueance and repayment of debt... If the music stops, there are not enough chairs, and bad things happen...



This is not a bad system - on the contrary, it's the best one there is... However, this means that you can't let the music stop, so to speak...



2) If you grow the economy, the debt-to-GDP ratio improves (national version of debt-to-income)... This is where 'inflate or die'/'grow or die' (they are the same thing) comes from - our economy can continue to take on ever-increasing amounts of debt safely, but ONLY if we continue to grow it at 2-4%/year in perpetuity...



Zero growth is impermissible - and fatal...

Prices of everything would drop, because no one would have any money or credit to pay the existing prices...



What good is a loaf of bread for a dime, if you get paid a dime a month (ridiculously extreme/absurd example, but it gets the point across)....



 

Do you think Derringer wears a toupee ?

Should we go into gold or a foreign currency?

Deflationary collapse means the $ will worth more.

The US is currently in a deflationary spiral.

1. Falling Demand.
2. Falling Prices.
3. Debt  Defaults.
4. Bankruptcies.
5. Layoffs and Wage Reductions.
6. Back to 1.

The problem with the US economy is too much debt. In order to get out of the deflationary spiral consumers, too big to fail banks, companies, etc must be allow to default and go out of business. The debts must be clear out in order for the US to move forward. The government won't allow it because it will automatically set unemployment rate into space for a couple of years.

So they'll pump.  And maybe nationalize more.

Good question.

Yes we are pretty much fucked.

Yeah the recession is over, but the depression has begun!!!

denninger is just another asshole who is trying to predict everything that might happen, so in a few years he can say he was right - hoping that people will forget about all the times he was wrong.  inflation/deflaton/inflation/deflation.  he has nothing new to say.

But what about Savings?

In a deflationary spiral the $ is king because it will worth more. You get more for the buck.

China bring an interesting dynamic to the table. China is betting that the $ will weaken.  They been buying huge amount of Gold for the past few months. Gold has reach 1k. Hong Kong has move all its gold from London to Hong Kong for storage.

So something is weird in the world economy. You would expect if the $ worth more Gold would worth less because you can buy more with the $. The theory is that China will have hyperinflation because it is a credit nation and will un-peg the yuan from the dollar. The US will have deflation because we are a debit nation. Hence the paradox.

Exponential growth. What could go wrong!

Ever-increasing totals, yes. An ever-increasing rate and ever-decreasing ratio (both of which we currently have), HELL NO. No matter how fast we grow, we can't take the near-parabola we're working with now. If we don't do something, something is going to give, and it won't be a good something.


Which is happening anyway, at a slower rate.

I just bought something from Europe last night and found my dollar was only worth .66 of a Euro.  When can we get it to swing back?

That's why the stock market and unemployment keep going up. The US government spending a lot of money and effort to buy time in the hope of the US economy right itself up. That's not going to happen when you have over 600 trillion in total debt (consumer, government, banks, companies, etc).

During the GD and subsequent deflation....CASH was king!

Would this probelm have existed if they had just let the financial institutions fail?

Soon I bet. The Fed will stop quantitative easing at the end of October. QE has a negative effect on the dollar. Once that stop there is a good chance it will start raising. The stock market might tank tho.

Wiped out...





Either very fast, if you have lots of debt or you lose it in an investment/bank failure...





Or wiped out slowly, as you burn through it without means to replenish....





Unlike inflation, where it is possible to 'ride the wave' and come out ahead...





The key factor to a deflationary spiral, is that there is NEVER enough money - the lack of money causes prices to fall, but income always falls before prices, which forces further price reduction, and so on down the tubes...








To illustrate:





The US has an ~13 TRILLION dollar economy...





BUT





There are only $800 BILLION dollars actually in existance....





13 trillion walking in a circle...





800 billion chairs...





Music stops...





What happens?





12.2 trillion dollars of money demand, with no money to fill that demand....



AW SHIT!



Deflation kills everybody and everything in an economy... It wipes out the majority due to debt (in converse, above-expected-rate inflation is actually GOOD for fixed rate debtors), and all savings is good for is to float along a little longer...



It's to economies what starvation is to individuals - a fatal shortage of a vital commodity







 

Yep...



If you actually talk to depression survivors, the common theme is stores (the ones that stayed open,anyhow) full of products, but no one had the money to buy any of it...
 

Yes it will existed because the high debts occur for the last two decades. Low interest rate drive up people and business spending habits which translate to higher debt. If the banks was allow to fail last year we would have seen unemployment rate over 30%. The good news would be that a lot of the debts will be off the balance sheet. The US economy would be free of the drag and unemployment rate will start to drop.

Print more money.  Get it into the system buy buying things that the goverment needs that actually create jobs. Buy weapons, increase the size of the armed forces.  Don't give the automakers handouts but do have the GSA buy up their unused capacity, use what we can, send the rest to the recyclers.

Multiplied several times over... Defaults on debt destroy money even faster than institutions not lending.... And 'letting them fail' would have caused alot of defaults...



The purpose of TARP was to stop exactly what the article describes... Weather it did, and if not, weather it could have if executed as originally intended, remains to be seen (a Deflationary Spiral is not a foregone conclusion, but it is FAR, FAR more likely than the hyperinflation boogeyman that the gold-bugs keep pushing)...





The reason that the FED is doing QE, and the federal funds rate is near zero, and they are lending money directly for the first time in history....





Is that they are huffing, and puffing, and praying that we get inflation...





We had an essentially FLAT year.....





That is bad, bad, bad...



 

A lot of bad shit, ending with a lot of people a lot poorer, a few people a lot richer, and the dollar and prices of goods are back to where they were in about 1917, and a lot of repair work to do to get back to today's standards.

Destroyed money should be the easiest thing in the world to replace.  Print more.  If everyone is hurting, they won't question, the normal devaluation from such printing like in Weimar Germany would be short circuted.

It doesn't matter how much money you print. If it isn't in the consumer hands it is worthless. That's is what happening right now.

The banks can't lend because:
1. They are heavily in debt.
2. The consumers and companies that need the money have been tapped out or have bad credit score.
3. The consumers and companies that have good credit score and good balance sheet is not willing to add more debt. So they forgo any lending from the bank and opt to paid whatever debt they may have.

Only it doesn't work like that.

In the world you postulate the treasury printing another 12 trillion dollars to add to the current money supply wouldn't have much of an appreciable effect. In the real world that would wipe out the entire American populace and most of their businesses financially. It doesn't make anything better, and it makes a whole lot of things a whole lot worse.

That's what JM Keynes would suggest, anyhow...



And personally, if we are going to go Keynsian, I would MUCH prefer we do it that way, than the way the current administration is going with nature trails, bathrooms for hobos, and bridges to nowhere... Buy F22s... Build up the Navy... Give the Army the budget to 'A3' all of our tanks & put optics on all their small arms...



EG, use the rising dollar value to buy things that have lasting value to the country...



With that said, personally, I tend to be more of a fan of what the FED is doing now: QE, fire-sale interest rates, etc...



But if that doesn't work, we'll have to come up with *SOMETHING*...



Because deflation, left unchecked... Kills economies like RAID kills bugs...



 

The problem is, you can't print it fast enough, nor get it to where it needs to go to have an effect...



It's like having a person bleeding out on the ground, and trying to save them by pouring blood all over their chest...



You waste lots of blood, and the guy dies anyways....





 

Banks can be paid to loan money to people.  Send cash to the survivors and tell them that the cash comes with the condition of loaning. Buy back all goverment paper they hold while your at it.

Spot on...



Which is why we must do everything within our power to prevent it...



Including 'things' like TARP...



 

Are their other ways to do it without borrowing money from overseas though.

Dave_A do you think this will actually happen or are you fairly confident that the Fed will continue to promote inflation to stave off the scourge of deflation?

Also wouldn't the prolonged inflation of our currency lead to other countries cutting off our debts and the end of the dollar as the worldwide standard to do business in?

I think this is the first thread that said "shit's gonna get bad,unless.." and you actually either agreed or participated without shooting holes in the chicken little theory.

It's obvious that your intellegent and like many people here I'm just trying to educate myself to be better prepared should SHTF in any of the varying degrees that it may do so.

The other threads generally all promote the same, fallicious theory...



They mix personal morality with economics, to create a witches-brew of crap that predicts the eventual worthlessness of the USD based on nothing more than the belief that 'this must happen' because 'we deserve it' for committing a variety of populist sins (banking, borrowing, not working with the hands, etc)...



On the contrary, what this thread represents, is a discussion of the logical REAL worst-case scenario...



Note, I didn't say that it's going to happen...



But if things really do 'go bad' (vs the present 'ordinary recession' we are having) then this is the way they will go....



Our system is based on the hyper-efficicent use of $800bn in physical printed money, to support a $13TN economy...



It's a very good system, simply because it allows us to - in NORMAL times - adjust the money supply up or down based on inflation vs growth, by way of interest rates...



The problem we are facing now, is the equivalent of a heart attack - the $800bn of 'blood' (money) isn't circulating fast enough to keep the body (the economy) alive...



Personally, the FED can handle this just fine, so long as the fools on Pennsylvania Ave don't dick around with the economy anymore - the greatest threat to recovery, is political meddling - especially political meddling in the name of 'equality' or 'fairness'...



The only thing you can do, personally, is budget well, don't get fired, and enjoy the ride...
 

Dave I came here to argue with you, just to be onry, but I don't have much in the way of economics education, so I'm gonna throw poop at you instead...dunk mofo!!

*hurls deflated poop*

I'm so glad I come to such a happy website. INFLATION in the morning. DEFLATION in the evening. Race and class wars in between.

We're so fucked

So what you're saying is I should keep the money I have in the bank and wait for stuff to cost less?

Thanks Dave, I'll try not to fire myself anytime soon....

I guess once Obama nationalizes my job, I won't have to worry about finding work.  So many physicians will dial back, and stop busting their asses for the same salary, that they'll need a sh*tload more of us to take care of the same patients.

*sigh*

*ducks, throws back a bananna*





Fuckin bad monkeys... Slingin poo...





Someone, spank that thing...





 

This is all jibber jabber..



The economy is fine, the recession is over. The talking head on TV told me so.



GREEN SHOOTS!!!!



Anybody wanna share a cardboard box?

I've got dibs on that pile of filthy rags in the corner.