The Gathering Economic Storm


by Karl Denninger, Market Ticker:

You may think “all is well” or at least “all is reasonably ok”.

You’re wrong.

Just as in early 2007 it was clear that we were staring down a monster problem and whistling past the economic graveyard, we are once again doing the same thing.  In early 2007 I called out the fact that WaMu was paying dividends out of money they didn’t actually have; it was a (legal) accounting fiction created by negative amortization loans that made it appear they had “value” that didn’t really exist.  Of course it could have been ok in that case because perhaps people could have eventually paid all they owed at an ever-increasing rate, but to believe that you had to believe that infinite re-finance activity at ever-lower costs was going to continue forever, because either that had to stop and people had to pay on what they owed (in which case the “value” stopped going up and earnings stopped happening), it must continue (to keep the trend going) or there was soon going to be a crash.


The latter happened.

What we’re facing now is much worse.  Then it was speculators in Real Estate whether people were admitting it or not; anyone claiming income they didn’t actually have was committing fraud on top of it — bank fraud, I remind you — and deserved what they got.  And got they did get.

But over the last 30 or so years government has come to believe that continual deficit spending was not inflationary.  That’s a lie. The lie has been propagated by buffers that were set up for entirely-different reasons, specifically trade sequestration occurring as a result of international supply lines, Social Security and Medicare programs and, after the ’08 crash, “QE” and monetary abortion it produced, specifically paying banks to park excess reserves and keep them out of the economy.

But just as when you commit incest bad things tend to happen so do these sorts of machinations.  Specifically the latest game-playing has been in the overnight reverse repo market.  But this is declining and, at present rates of change will run out early next year.  The other big problem is CMS — Medicare and Medicaid spending and the bonds the trustees hold against previous deposits.  The latter is headed to zero and offsets the deficit impact of said spending that is wildly in excess of tax receipts — for as long as that lasts.  When that reaches zero there is no more cushion against that and all of that spending in excess of tax receipts immediately shows up in the deficit.  At the present run rate of about $1.9 trillion for this fiscal year ending in September when that happens it will add close to 50% to that number.

Remember that the excuse to huge deficits was that we were in a health emergency — a pandemic — and we had to force people out of work and businesses closed, thus taxes would go down and so would wages; we couldn’t let people starve.  Ok, fine and well, that’s a decent political argument but the pandemic is over.  So why are we running $2 trillion in fiscal deficits for this year ending in September?

We reset the baseline federal spending to $6 trillion, more or less, and contrary to the claims that all this new economic activity would mean there would be more output and thus more taxes as it has actually turned out that was a lie and tax receipts are falling.

This of course makes the deficit larger but even at $3.2 trillion annualized in tax receipts with $6 trillion in spending you’re close to a 50% fiscal deficit and a roughly 11% inflation rate given that GDP is approximately $26 trillion.

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