Sunday, December 9, 2012

Financial truth - it's not rocket science!

The inimitable Karl Denninger has put up two articles that lay out the unvarnished, truly perilous fiscal reality of our present economic situation.  There are those who say that people like him are 'prophets of doom', seeing only the worst and ignoring the best.  Unfortunately for such people, Mr. Denninger and those of his ilk are operating on a solid mathematical foundation.  Mathematics has no bias.  Numbers are cold and clinical in their reality, and in the reality they forecast.

In his first article, Mr. Denninger points out that neither the Democratic nor the Republican party:

... has any association with the facts, and they know this.  They are liars and frauds and I am hard-pressed to find just one who has spoken in a truthful manner about the budget, the problems facing our nation from a fiscal perspective, and what has to be done.

. . .

Since all money is debt-backed in our economic system it is trivially easy to determine the expansion of GDP over time removing out the expansion of debt.  This one must do in order to obtain an accurate accounting of actual output.

So let's do that.

. . .

In 1980 GDP stood at $2.724 trillion.  Today, it stands at $15.775 trillion, 579% of its 1980 value.

However,  all forms of debt in the Z1 stood at $4.398 trillion in 1980, at the same time GDP stood at $2.724 trillion.  That is, monetarily one unit of GDP was represented by 1.61 units of currency and credit.

In currency-invariant terms, therefore, our GDP was 0.619.  We'll make this convenient and multiply these invariant terms by 1,000; ergo, our currency-invariant GDP was 619.

So what is it now?

Today, we have a GDP of $15.775 (from the latest preliminary estimate) but debt of $55.358 trillion.  That is, monetarily one unit of GDP is now represented by 3.55 units of currency and credit.

In currency-invariant terms, therefore, our GDP is 0.281.  For convenience we again multiply by 1,000; ergo, our currency-invariant GDP is at present 281.

619 is about 220% of 281, or, if you prefer, GDP in invariant terms is 45.4% of what it was in 1980!

Growth?  Where?

There hasn't been any; what there has been instead is a scam promulgated by both political parties ...

. . .

The middle class is being destroyed because government is both directly stealing from the people via deficit spending and allowing banksters to steal from the people via the unbacked emission of credit, destroying the purchasing power of their earnings and the economic output of the nation as a whole.

We can only address actual problems when we talk about them in honest terms.

There's much more at the link.

In his second article, Mr. Denninger points out how government programs have increased in size and cost until today, they consume a vast proportion of our economic output.

... assuming 1980 as a baseline (and I can cleanly argue that 1980 is entirely too generous, incidentally) what does the percentage of invariant output -- that is, actual output of persons and firms in the United States -- look like for [health, pensions, defense and welfare] government programs when adjusted for credit debasement by both government and private banking interests?

Those four programs  consume 42.89% of all productive output in the United States economy today, adjusted for the currency debasement effects of both Federal Deficit Spending and unbacked private credit issuance using 1980 as a baseline -- and that date is being generous.

If you want to know why we're utterly screwed it is because almost half of everything the economy produces is instantly sucked up by these four government programs, standing alone.

It's not half the Federal Budget folks, it's nearly half of the entire economy.

Again, there's more at the link.

Friends, this is why no amount of encouraging 'warm-and-fuzzy' economic data released by the federal government concerning the unemployment rate, or inflation, or the deficit, or anything else, has any real importance at all.  The fundamentals of our economy - the foundations upon which everything else is built - have been systematically eroded and falsified over many decades, by politicians of both major parties.  I'm not saying this problem belongs to the Democratic Party or the Republican Party - it belongs to both of them, and to the American people, who've failed to exercise wisdom in choosing politicians to represent them and enact laws and implement policies in their name.

The plain and simple truth is that economically, we're screwed.  There is no possible way we can dig ourselves out of the fiscal hole in which we now find ourselves.  The debt is too large to repay;  which means we must either default on it (thereby forever trashing the 'full faith and credit of the United States') or allow - even encourage - massive inflation, so that we pay down old-money debts with new-money, almost valueless currency.  The same applies to the massive government benefits on which so many rely.  They're all being paid for by borrowed or artificially-generated money.  When we can no longer borrow money (because no-one will trust us to repay it in currency with any value), and must stop generating more money because our economy has imploded, those benefits will stop too - or they'll be paid in inflated dollars that won't buy anything like what they bought before, in terms of both quantity and quality.

There is no other way out.  These consequences are mathematically inevitable.  They can be delayed or postponed through financial shenanigans and budgetary jiggery-pokery, but not removed.  That's the real reason why the current Administration hasn't tried to produce a budget for almost four years.  If it did, the true magnitude of its fiscal fecklessness would be revealed to the American people, and it daren't do that.  Instead, it hides behind obfuscation and lies.  (The previous Administration used other methods to hide its financial mismanagement, but it did so as well.)

That's why I've been saying for months - years! - that we need to get our personal financial houses in order, so that we as individuals and families are as well-positioned as possible to survive the chaos that's coming.  (I guarantee you, none of us will survive it unscathed and/or unaffected.)  This is why I also stress the need for emergency preparations, so that if social unrest breaks out when the entitlement and 'gimme-gimme' taps are turned off, and the support structures upon which we've come to depend are interrupted or break down (hopefully only temporarily), we'll be in a position to cope for a reasonable period of time.  I don't believe anyone can prepare for a global economic meltdown of truly catastrophic proportions, but we can (I do!) hope and pray to be spared such a calamity.  If we're not . . . we'll just have to deal with each day as it comes.

I firmly believe harder times and more difficult conditions are coming.  I don't see any way in which they can be avoided.  Mr. Denninger's facts and figures merely illustrate why they're coming, and why they can no longer be avoided.  We have no leaders who are honest enough to acknowledge that, and/or wise and effective enough in their leadership to find a way out of the mess.



Oleg Volk said...

Would default on government debt have much effect on private credit-worthiness?

Peter said...

Oleg, government default would trash the entire country's credit-worthiness on international currency and financial markets. That would have an inevitable impact on private financing.

Also, it would debase the currency by undermining its value, which would also affect everyone using, buying, and being paid in that currency.