Karl Denninger has done it again with another great Post (edited below).
He says the odd weird thing sometimes, but he is spot on with this one.
My call has been that this Great Depression would just continue to slowly grind on and on, and take us lower and lower, until we couldn’t deny the reality of it any longer.
We still are mostly in denial, and if for just that reason alone, things will continue to get worse.
But here it is quantified, for those of you who are actually interested in getting a grasp of the “no-escape future” we have created for ourselves.
(follow up to Define “Monstrous Contraction”)
~ Karl Denninger
The 2008 Federal Fiscal Budget (Oct 07 – Oct 08) expended approximately $2.9 trillion. It produced a budget deficit (actual) of approximately $500 billion.
In 2007, I pointed out that in order to bring the government into balance and stop the Ponzi finance we would have to cut government spending by approximately 18%. This $500 billion in deficits represented approximately 3.5% of GDP.
I was ignored. Today, the Federal Government is running a deficit of approximately $1,700 billion dollars, or 12% of our now-current GDP of $15 trillion.
The “budget” is now roughly $3.8 trillion, or 31% higher.
To bring the ponzi under control now we must cut federal spending by some 43%, or about 2.4 times as much as we had to in 2007. We also must accept a contraction in GDP that is almost four times greater than we had to in 2007.
Now let’s add some other ugly (very ugly) facts.
Despite the financial crisis of 2008, banks have not been forced to stop lying about asset values – and not just here in the United States. That is, the sovereign Ponzi finance game is being “covered up” by banks claiming values on their balance sheets
that do not represent reality .
There is no evidence that our lawmakers give a damn about how much our government – and GDP – must contract to restore balance.
We continue to hear the lie about “growing out of it”, but the fact of the matter is that even if we could generate 5% GDP growth – and we obviously can’t, as we’ve tried and failed – it would not close the funding gap.
The government expanded by 31% in four years. That’s a seven percent compounded growth rate. You would have had to generate more than 7% in economic growth annually, four years sequentially, to keep up.
That’s not only isn’t going to happen, it didn’t happen.
The market has figured this out, and it’s larger than the government. By definition it has to be. Private actors in the economy have come to the conclusion that the government is literally clawing at the cliff-edge trying to avoid going over.
You only thought the 2008 crash was bad – you’ve seen nothing to prepare you for what’s coming if we do not act now.
I wish there was a way to be “bullish” about the intermediate-term future given these facts. There’s not.
This is not a US-centric phenomena. We’re currently benefiting, if you can believe that. It won’t matter.
If we do not take our government contraction that is required today – right now – we’re going to get to the point where we can’t take it, as it will be effectively a 100% reduction (ex-interest.) It is already more than half, assuming you intend to pay the interest bill – more than double what it was just four years ago.
In four more years at present rates it will be an effective 100% and the game will be over.
There’s your timeline. We fix this now or we go off the cliff.
It will suck severely to fix this now. Seniors will not get what they were promised and it doesn’t matter who they are (yes, this includes military veterans). Others on various forms of public assistance will have their giveaways cut in half or more.
We have to withdraw from Afghanistan and Iraq – whether we deem it operationally correct to do so or not.
Our economy will contract – mathematics guarantees a 12% contraction, and due to the knock-on effects it will be much worse – probably 20, maybe even 25%. Unemployment will go up by 50% from where it is now, at minimum (that is, to 15%) and may reach 20%. Government workers will have to have their salaries and benefits slashed – by 30% or more.
We will recover from this, but only after the excessive debt (half or more of it in total) is flushed out of the system. Most of that is in the private sector, believe it or not, and it has to go away.
This means mass-bankruptcies, failed large banks and the collapse of corporations that are levered monstrosities.
We must accept mathematical reality and stop trying to interfere with it – before we reach the point where the necessary contraction exceeds our ability to absorb it without political and social system failure.
There is no “EASY” button, nor are there incremental changes we can make that will solve the problem. We’re 20 years too far down the road to do that
We deluded ourselves serially for three decades and the only resolution is to accept the economic damage that must be absorbed.
Housing must have the supports ripped out from under it. House prices will find a natural level where a majority of people can save and pay cash for them. That’s as low as 1x incomes.
Ludicrous? No. Reality.
Will this mean adjusting expectations? You bet – that granite countertop won’t be the mainstay in “middle-class” homes, it will be present only in those houses where the owner is truly wealthy. The average home size will shrink to around 1,000 square feet for a family of four. A lot of the crackerjack boxes we built in the last 20 years are literally worth nothing in terms of resale price as their carrying costs exceed their utility value without the financial ponzi that enabled them to be built.
Municipal and state finance must shrink by half – or more. Lots-a-cops and firefighters? Nope. Few cops, volunteer firefighters. And those who do stay on will have their pay and benefits cut too – again, by a third or more.
We simply have to return to “community protection” where you and your neighbors take most of the responsibility – which means your neighbor (or you) is a member of the volunteer fire department to respond to a fire call.
We accept that we cannot afford high-brow paramedic ALS services in our neighborhoods – we may like them, but we don’t have the money. That’s the only way we can provide basic protection for fire, and similar, in a way we can afford.
It doesn’t matter if you like this or not: It’s (again) mathematics.
Schools? No more B/S administrators with cushy $200,000+ salaries and gold-plated health care and retirement. Ditto on the benefits for teachers. Teach because you love it, and for no other reason. Yes, salaries will go down. But so will the cost of living (see above on your new housing expectations) you’ll be able to afford it.
Oh, and no more technology spending either – we need to return – right now – to phonics for basic reading, 4-function math done with a pencil and paper (no calculators!) and language competency demonstrated through writing, and we must get all of that basic instruction done by the end of fourth grade. All this “new math”, “whole language” and “integrated classrooms” for disruptive students must go in the garbage right now – they are luxuries we can neither afford in educational results or in money terms.
Retirement? We can’t pay you what you were promised.
We can fix Social Security, but the underlying medical system is broken and full of cost-shifting and subsidy we cannot pay for without ponzi credit expansion.
If you’re a fat-ass and refuse to fix that, we’re not going to be able to do anything about the consequences any longer.
I personally have dropped nearly forty pounds since March of this year and am in the best overall shape of my adult life. Levels of exertion that would have literally led me to collapse six months ago are no longer even moderately difficult; I can labor outdoors now for hours and while I still sweat like a pig in the heat it’s no longer “hard.” The simple fact of the matter is that if you’re a fat-ass the solution is to eat less and move more and while it’s hard when you start the longer you do it the easier and more-rewarding it gets.
Be honest with yourself – if you’re a man and when standing naked with your back flat against the wall and tilting your head down until your chin strikes your neck cannot see your flaccid dick without sucking in your gut, you’re a fat-ass.
We simply can’t pay for it any more, so those of you who wish to take the risks are free to do so, but you soon won’t be able to charge off the cost on anyone else. Electing to remain a fat-ass will mean that if you lose the dice-roll on the consequences society will not be able to prevent you from suffering those consequences, including death.
We must level with the American people:
80% of your health care dollars are spent in the last year of your life, and the majority of health spending has at its root lifestyle choices. We must accept our mortality and that if we cannot afford that “end of life” expense we won’t get it.
We must also accept that self-inflicted medical expenses will either be ours if we have the money, or won’t be provided if we don’t.
Likewise, for those who wish to coddle the illegal immigrants in this nation, you are going to be the ones who take care of them – plantation style if you must – or they have to go. Right now.
I don’t care if this is considered politically correct or not. We simply don’t have the money to play “English as a second language” to a bunch of Mexicans who come here to pick strawberries. We lose three ways: we have to educate their kids who start at a severe disadvantage, we have to cover their health expenses as they earn an insufficient amount to do so on their own and our people don’t have the jobs picking those strawberries.
To those who say Americans won’t do these jobs, they sure as hell will when the alternative is to starve – and we’re not able to fund the “funemployment”, “food stamps” and other similar programs any longer. That day has arrived.
We must stop the narco-war.
We can’t afford it and we need the tax revenue. I know this will be sacrilege to many, especially on the right, but the drug war has massively driven up the cost of government through imprisonment expense, permanently blemishing people’s records with felonies for non-violent consensual conduct and the dramatic and outrageous expansion of policing costs – we simply cannot afford it any longer irrespective of the frothing-at-the-mouth lies told by those who promulgated this policy going all the way back to Harry Anslinger.
Never mind the civil liberties issues raised, this is first and foremost an economics issue. To those who claim that dropping the drug laws will lead to monstrous societal health expenses born by the taxpayer see the previous point – no it won’t, because we don’t have the money.
If you wish to smoke crack until your heart explodes, that’s fine — but when you have that heart attack as a consequence you will die.
This must be respected as a choice, while we remove from the budget that which we cannot afford.
For those who get trapped but really don’t want to be dopers we should (and can) establish a tax system on these substances and fund voluntary treatment options with that tax revenue.
Let us remind ourselves that marijuana was made illegal originally on the back of the claim that smoking it would turn white women into “trash” that would sleep with black men. Yes, it really was a racist thing.
We must fix our trade and energy policies. No nation can survive running trade deficits into the indefinite future. Trade deficits drain capital and ultimately destroy your productive base – and we’re the Poster-child for the bad effects of these policies.
We cannot allow wage and environmental arbitrage to be the focus of our trade policies (and we do).
These things can be changed and we must change them right here, right now, today.
I recognize that many people will resist these points. Go right ahead and resist.
But if you wish to comment on why these are not inevitable changes, with the only other alternative being political and social system collapse on a scale never seen in this nation, not even during the depths of The Depression, bring your math.
Claims that “we can muddle through” – without evidence, or worse, backed by nothing more than political lies – are no longer sufficient or “in-bounds” in this debate.
We could find ourselves in the throes of severe civil unrest, perhaps even political system failure.
You had damn well better wake the hell up today or you will suffer the consequences!
Karl is American, and talking to Americans… But everything he says is true of here also.