Wed, Apr 4, 2012
From The Market Ticker
Nearly four years after the financial crisis began, regulators on Tuesday finally agreed to the criteria they will use to decide which parts of the shadow banking system to regulate, but they still haven’t imposed tougher standards on a single insurer, hedge fund, private-equity shop or money-market mutual fund. Failure to do so exposes the U.S. economy to unnecessary dangers.
How about putting a stop to counterfeiting?
Yes, let’s just call this what it is: counterfeiting of our nation’s currency by these institutions. And we haven’t stopped it because if we do then we’re forced to face rality, and that’s a bad thing from the point of view of all the pigs at the trough — including those in DC.
For the first three months the Federal Government added $ 359.1 billion in new debt to the Federal Balance sheet. This is approximately $ 1.4 trillion, or 9.4% of the economy.
To put this into proper perspective one must understand that this is 9.4% of alleged “demand” for goods and services that does not actually exist. That is, it is fake demand, as you and I do not earn enough money to pay for those goods and services. By conjuring this new debt out of thin air the government is presenting to the economy a claim of demanded goods and services that doesn’t really exist and never did.
We have been told that the economy “de-levered”. This is a lie.
What reduction of leverage? The Federal Government has simply stepped in to prevent the removal of that excess leverage. And by doing so it has taken over the role of the “shadow banking system” in propping up demand — replacing what was blatant and outrageous counterfeiting of our nation’s currency.
There has been no enforcement because the people in DC — including Bernanke — know damn well that the day that this leverage comes out mathematically a deflationary depression cannot be avoided.
But the idea that we can continue to avoid the need to adjust our economy back down to that which we can actually pay for with real production and real earnings is a fallacy. Eventually one must stop borrowing more and more money to present a false picture of demand. Your only option is to do it voluntarily or be forced into it when the lenders realize they will never get repaid and cut up your credit line.
There are those who think there is some way to avoid the pain that has to be taken in the economy. That we can avoid telling seniors the truth — their “Medicare” was never funded and won’t be, because it can’t be. That students now amassing $ 100,000 in debt to get a degree in sociology were fools and lived high on the hog beyond their ability to pay — and thus will go bust (as will the schools that led them on.)
That everyone cannot have a pony, to be blunt.
I’m quite surprised that the charade has gone on as long as it has, to be frank. I didn’t think we’d get through 2010; the 2009 scam in allowing the banks to “extend and pretend” would blow long before now. That they got more than a year beyond my wildest expectation without it all coming apart has been a rather rude surprise.
But no small part of that surprise came about because I never believed our elected and appointed officials were so dumb as to try to run this scheme this far out, for this long. They know the disaster that waits around the corner. They know full well, especially Bernanke, that the real monetary inflation over the last few decades looks like this:
The hubris displayed by these jackasses thinking that mathematics — the basics of exponential functions and the ever-larger amount of distortion that must be added just to tread water — can be cheated is astounding. It boggles the mind to believe that any man, or any set of policies, can cheat math; that sort of magical thinking borders on what infested the dark ages in the form of alchemy.
I believe that Bernanke, and the rest of the FOMC, are coming to realize that their grand scheme not only didn’t work but can’t. Oh sure, there is one constant in Washington DC — you will never hear anyone there say “I fucked up.” Three little words that are simply never spoken within the beltway.
The not-so-amusing part of this mess is that not only does Bernanke know how far he’s in the soup but I suspect he knows how far Obama has shoved him down the bowl of the toilet. Obama’s recent tirades against the United States Supreme Court has now led to a formal rebuke and “homework assignment” in one of the Courts of Appeals. His revisionism has departed from reality to the point that the Journal’s outline this morning reads like something of Aesop.
But all of this comes from the same delusion — that the leverage of the last 30 years, and the political promises, could somehow be met and the people who were alleged “beneficiaries” would get their “free cheese.”
That’s a lie, and it’s one that we had better get out in front of and deal with, whether we want to or not. We must tell the truth. Our legislators are no better at this than Obama is, despite the Journal’s protests to the contrary, and Mittens Romoney is one of the chief architects of leverage abuse himself. He will no more balance the budget and withdraw the morphine that we have built our current house of cards on than will Obama.
There is no solution to be found in more fraud. And make no mistake — the claims being made in this regard are nothing more or less than frauds. Our Central Bankers are fraud enablers — they knew damn well that the so-called “MBS” had no mortgages in them, for example, and that these loans were being written to people who had no money, no job, no assets and no ability to pay. They didn’t care because if they blew the whistle on this scam and shut it off the banks and non-bank institutions, such as insurance companies and pensions, would have been instantly rendered insolvent.
But pretending you’re solvent doesn’t make it so, and continuing to do the same thing that rendered you insolvent makes you more insolvent. In this regard Paul Volcker’s brush with the banks is instructive — he knew they were all broke after they made disastrously bad loans without regard to ability to pay but while he provided them forebearance on their marks he also told them that they had to get that crap off the balance sheet and stop lying or he would close them down.
In short, he told them to get the leverage out of the system and do it in a reasonably-contemporary fashion — or else. They complied because the alternative was that they were all out of business and they knew it.
This time around we’ve done nothing of the sort. We’ve not done anything aobut the scams and frauds. The claim of “de-leveraging” is a damned lie; all we’ve done is shifted who’s carrying the leverage, adding ever-more to the Federal Government in a puerile and futile attempt to prevent recognition of the truth.
It won’t work folks. It never has in the past and it won’t this time. All it will do is make things much, much worse. As we have seen massive shifts in the markets and a dramatically “straight up” sort of market mentality has taken over the dangers have gone through the roof. The markets, addicted to the morphine provided by The Fed and Obama, are now at the point of being so addled that the “hot money” bubble risks bringing not just recession but a literal collapse of our government’s funding.
If you believe this is hyperbole you’re simply dead wrong. The deferment of bad debts does not make them disappear, and when the root of the problem is compounding deferment makes the problem much worse, as the distortions compound as well. We are now in a position where a literal 30% or more of our economy exists through nothing more than compounded leverage abuse and should the Federal Government’s deficit spending disappear through choice or externality an immediate contraction in GDP of more than 10% would result.
We still have the ability to choose to do the right thing, but that choice is soon to disappear.
To those who say that the “powers that be” will never allow this to happen, the simple reality is that the choice isn’t theirs to make. If you believe it is then it is incumbent upon you to demonstrate through mathematics how they’re going to achieve what you claim will occur.
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