I was right, but I didn't know why

Karl Denninger crunches the numbers: in the last 8 years, US GDP has increased by $14 trillion, but debts by $23 trillion, so effectively accounting for all the GDP growth in that time and still leaving a deficit of $9 trillion...

... we haven't had an expansion in GDP over the last eight years. Congress and its organs of reporting economic "facts" have lied. We have in fact actually seen about a 10% contraction in real GDP from 2000 levels; all of the so-called "expansion" of the Bush Administration has been a lie intended to prevent recognition and working through of the recession that should have happened in 2000.

Now, I sensed this during the last 8 years and felt it coming before then, and have recently said so several times. I'm only grateful that technical whizzes like Karl have managed to spell it out. If only we had taken our lumps after the technology bust of 2000.

A credible, horrible warning

In a fearsome, plain-speaking guide to the long-standing debt problem, Karl Denninger explains why he believes we are now in dire crisis. If the insolvent continue to be bailed out with money that the government itself must borrow from elsewhere, the American government's own credit will be destroyed. And non-Americans are in an even worse plight, in fact may trigger the explosion:

We may be days away from an international credit incident originating outside of the United States. Foreign nations, banks, and businesses have "levered up", or taken more risk, than we have. They too have chosen to lie.

This will hammer the stockmarket:

You have already seen nearly half of your money disappear.
You could see another half disappear - within days.

This is an implication of the graph I did on Sunday (see below), looking at the Dow adjusted for CPI inflation since 1928. A return to 4,500 points would seem to be reversion to the long-term norm - but to have it happen all at once, from its peak last October, is a scary prospect.


UPDATE

Tyler concurs, with respect to the UK economy, because of our dependence on income from financial services and associated services:

"Brown's boom was built on a group of industries that are now facing an Almighty bust..."

Throw the grenade, or put it in your pocket?

I was educated in the wrong things. Karl Denninger explains - in a way I struggle to understand fully - how the US government's schemes to support the banks must ultimately be financed by Treasury bonds on such a scale as to seriously damage their credit rating and pump up interest rates to a ruinous level.

This is a consequence of avoiding taking the right action, i.e. finding out who's insolvent and letting them go bust. I still remember Henry Paulson's panicky look when Congress threw out the bailout bill the first time.

Once you've pulled the pin out of a grenade, you can throw it, or you can hang on to it. Madly, it looks as though the government is following the latter course, and hopes to be able to handle the consequences.

UPDATE

Relevant to the above is Wat's resume of public debt history in the UK since World War II, showing how important it is NOT to get into debt, to fight inflation and control the finances.

Do-it-yourself Dow prediction

I've battled Windows Vista to produce the above graph, which takes the Dow at the beginning of October each year from 1928 on and adjusts it for CPI.

The red dot is where we were on Friday; some are saying it could hit 6,000 or 4,000, also indicated (adjusted for CPI as at the end of September 2008).

The question is, how much of the fantastic gain of the past 20 years or so will be undone, and over what period? Where would you say we "ought" to be? (Not that Mr Market cares, obviously.)


Connect up the lows of the early 30s and the 70s and extend the line, and you get what? An implied 2,500 or so. Connect up the highs of 1929 and the 50s and extend the line, and you end up about where we were at the start of this month, nudging 11,000.

"Faites vos jeux, Mesdames et Messieurs." Too rich for me, I think.

UPDATE

Karl Denninger is now talking about the S&P 500 falling to 500 points, a level it first broke above in March 1995; this would mean a further c. 50% drop from its close on Friday.

And he gives his reasons (plausible to me) why the American economy is in worse shape to overcome the setback, than it was in the 1930s.

A future case for impeachment?

The threats:

htp: Karl Denninger

The result:

At least $125bn is to go to nine of America's largest banks, including Citigroup, JPMorgan Chase and Bank of America, in exchange for capital under the rescue plan.

The power:

(9) TROUBLED ASSETS-

The term `troubled assets' means--

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

...not "prior approval", you'll note. For those that think they understand law, here is the full text of the genetically-modified bill as enacted on 3rd October 2008.

And here's an intriguing clause in Section 119:

(2) LIMITATIONS ON EQUITABLE RELIEF.—

(A) INJUNCTION.—No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101, 102, 106, and 109, other than to remedy a violation of the Constitution.

Excuse my ignorance, but is this a watered-down version of the infamous "non-reviewable" Paulosn proposal ("Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.")?

More dire warnings

Karl Denninger is predicting a bond and currency crash in the US if banks aren't forced to disclose exactly what they do and don't have, so we can let the insolvent go down and release the liquidity into the right channels.

I hope the right path is taken, because my brother lives there.

By the way, in body language terms I read Hank Paulson as a hell of a bully. He looks like a totalitarian danger to me.

Crisis

Karl Denninger is sounding absolutely dire warnings about the market (Dow 4,000) and the economy; recently Jim from San Marcos said Dow 2,000 (and I do so hope he's completely wrong). This getting well into the worst fantasies of the Cassandras and we must hope that our apparently ignorant political class wises up fast.

Snap! And crackle...

On Thursday, I noted that, in the last 12 months, America has paid over $400 billion in interest payments on "the debt", AND increased the debt outstanding by around $1 trillion, making a total of $1.45 trillion. (I know I'm adding apples and oranges, but both elements are burdensome obligations.)

Now, noting the drop on the Dow and the cost of rider-bribes to the bailout bill, Karl Denninger is at the fruit-summing game:

Bailout Bill $700 billion
Additional Pork $150 billion
Dow (-484) in 3 hours $600 billion
Total carnage to you, The Taxpayer $1.45 trillion

The government is feeding the woodworms. Mish is convinced that deflation is inevitable ("There has never been hyperinflation in history with falling home prices.")

So you'd be forgiven for thinking, "What's the point in destroying even more money on this bonfire? Cut out and burn the rotten wood first, then rebuild the house."

Not so easy. The situation is especially bad because it's spilling over into international relations. Some American official (I forget who) flew over to China last year to get the Chinese to buy into mortgage-backed securities. Did the US really think a powerful partner would allow itself to be cheated when the package turned out to be rotten? (And didn't the Chinese know that, anyway? Isn't it possible they bought the rubbish because they were confident they could force the US Government to make good on it?)

I would almost say, buy into the packages the Chinese bought; but I expect there are ways to make the Chinese the preferred creditors and stiff everybody else.

Remember that Denninger has been saying recently, buy a good home safe and get your cash out of the bank? Let's see how unreasonable his doomster position turns out to be.

The $700 billion is to appease foreign investors?

I said in August that I thought powerful foreign creditors would refuse to be cheated, and now Karl Denninger tells us that the $700 billion bailout is to compensate these parties.

And that probably doesn't mean us Brits, either.

Boing!

Dow and FTSE back up again. Thought so. But unlike 1987, I don't think this will be over by Christmas. Bear market rally, don'tcha know?

Super post by Denninger today, too. He points out, among other things, that the Dow started falling yesterday when everyone (himself included) expected the Bill to pass. And as he says, Bernanke upped the money in the system by vast amounts anyway, and it still hasn't fixed the problem. Just how much petrol do you need to throw onto a fire to put it out?

Sell your house now?

If Karl Denninger is right and the long-term trend for house prices is 3 times income, instead of 5 or 6 as it seems to be now, then houses remain overpriced in real terms.

So even though house sales are seizing up and prices dropping, shouldn't we go ahead and sell anyway?

Carte Blanche; take cover!

We're back in the days of Dumas' Cardinal Richelieu (*), as London Banker points out. He quotes Section 8 of the proposed new US financial legislation:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

How is this to be subjected to democratic accountability?

I essayed a paranoid spoof on Friday, only to find it exceeded by reality. See Karl Denninger for more details of the amazing, autocratic powers proposed in the new US financial legislation.

This is not a sweary blog, but if that becomes law, head for the bl**dy hills.

Denninger also explains how the $700 billion limit can be manipulated to absorb infinite amounts of bad debt, by discounting on resale and then taking on more fresh garbage. He says:

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

_____________________________

(*) see Wikipedia:

"Dec. 3, 1627

It is by my order and for the good of the state that the bearer of this has done what he has done.

Richelieu"

It won't work

Karl Denninger pours scorn on the latest banking "solutions". I don't pretend to be as techno as he, but I trust my instincts, and they say that this is all like a Christmas play. If Fairy Bogbrush can wave her bristly wand and shazam! the grisly bathroom throne of modern finance is sparkly clean, then why can't she wave it again and make us all rich into the bargain?

But if it was that easy, who'd staff the checkouts, sweep the streets, change the bedpans etc?

Nope, it'll have to be paid for somehow, and I don't think the rich have reserved that pleasure for themselves.

Not the end, as long as you and I breathe

Looks like the US is in the process of nationalising the banks and the stockmarket, loosely speaking, and the UK is following suit; now Mish says Russia and China are doing the same. All is falling into government hands.

I've been wondering recently: if, in the idealistic pursuit of universal peace and justice, we ever did manage to establish a World Government, and it became (as all human institutions do), inefficient, bureaucratic, undemocratic, corrupt and more or less evil, how would anybody escape? Where could we go to?

And Denninger is now singing a requiem for American government and democracy; perhaps prematurely - hasn't the often-mocked blogosphere uncovered a depth of feeling among the people in favour of liberty?

Banks: justice will not be done

Financial website ThisIsMoney speculates that the FTSE could drop another 20%. I couldn't resist commenting there:

20% down would be about right. The banks have blown up a balloon for the past 5 years and then popped it - it's what they do. They cannot be punished severely enough, nor can the regulators who shrank reserve requirements. If the FTSE hits 4,000 I will finally be able to invest again.

This temple-cleaning call is also pretty much the view of Karl Denninger, but he's doing more emphatic bold, capitals and underlining - unconsciously betraying that he knows, deep down, that "it ain't gonna happen, Cap'n."

Financial stocks at risk

Denninger explains why rescuing banks and insurers mean the shareholder should exit now. Perhaps this explains the ruckus with HBOS?

UPDATE: looks as though Lloyds is angling to buy HBOS!

Finance in Wonderland

We're in a surreal phase. As Denninger points out, there is no legal authority for the Federal Reserve to accept stocks and shares as collateral, which it is now doing ("was that a wooden horse that came in through the gates?"). There is an air of unreality - huge firms suddenly going down, one by one, while we're trying to make ourselves believe that it's all still normal, somehow.

And now that Lehman has bitten the dust, we shall see whether London Banker was right - whether Lehman was calling in foreign investments in order to give US domestic creditors an unfair share in the asset recovery scramble.

The big one is yet to come

Karl Denninger gives his interpretation of recent events: hedge funds have been caught out badly betting against oil and the dollar, and the frantic unwinding hit gold. His prognosis is that sooner or later all the over-borrowing is going to take its toll:

There is a "supercritical" point where all asset values will get hit at once, unless the process runs to exhaustion first, and I don't think there is a snowball's chance in Hell that it will.

Meanwhile, keep your money safe.

IN- or DE: Denninger reasserts his position

Karl Denninger repeats - in his rather forthright and sexualised way - the simple argument that deflation suits the bankers who run the Fed:

... In a deflationary environment the banker gets as much of your money as he can, and then he also gets the house! [...] The banker makes money in terms of real value in a deflationary environment. You, on the other hand, being debt, get rammed."

In short, cui bono?

And in the Marc Faber interview cited in the previous post, Dr Doom maintains that the drop in the price of oil shows that we're already in recession; the drying-up - the sucking back out - of excess liquidity is what will make the dollar more valuable.

I once read a short story by Brian Aldiss, in which invisible vampire aliens ravage a farmer's livestock - all one can see is the double puncture. The skin is pierced, the innards liquefy and are drained. Sturdily, the farmer accepts that he has a new class of customer.

Is this not like banking and government? Without mortgages and inheritance tax, how otherwise would almost everybody in each generation be forced to buy their living quarters anew?

Fractional reserve banking - why bother?

Karl Denninger comments on the unfolding crisis of non-subprime mortgages, where he thinks losses will be even worse.

A question: why bother with any kind of reserve?

Once you've determined that banks can lend a high multiple of deposits, you may as well make deposits entirely irrelevant. In fact, it would save quite a bit on operating costs if you could have banks that specifically didn't take deposits from anybody - no cash in or out, so no tellers, no branches. Let the Federal Reserve or the Bank of England give a handful of providers a total lending limit, and then stand back and watch them pump away.

Insolvency? Loan-to-value not good enough? Raise the limits again, pump harder. Get a punter to overpay for one house and you increase the value of all the others in the street, so making their mortgages safer. And if the bank doesn't have to pay interest to depositors, it can charge as little as it likes for its loans.

I can't see the flaw here, any more than I can see the difference between a banker and a swindler.

I don't know why I didn't think of it before.