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And So It Begins…..

Posted 2011-08-06 11:15
by Karl Denninger

That didn’t take long….

United States of America Long-Term debt rating lowered to “AA+” on political risks and rising debt burden; outlook negative.

And so it begins.  With the outlook, it is clear that S&P believes this is not a one-step “and done” move either.

Why?  Oh, they were rather expansive on that point:

· The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

“We said $4 trillion and we meant it.

· More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

Granny cannot have her two new hips and Gramps cannot have his quad-bypass.  We cannot pay $100,000 for every man who gets Stage IV prostate cancer to have four more months of life.  We cannot have 1 in 6 families on food stamps and half the working population paying no income tax to buy their votes, yet at the same time spend $750 billion on wars (half of which is really about securing oil supplies; ergo, we cannot spend $300/bbl on imported oil and $200/bbl on all oil on average while claiming it’s only $100) nor can we spend $15,000 a year “educating” kids who do not understand nor care about the basic function of exponents.

And we cannot sit idly by while both political parties lie about:

  • Cuts that are not actually cuts.  Spending less than you intended to, but more than last year, is not a “cut.”  This is like a 400lb man going to the Chinese Buffet every day and eating five plates instead of six, claiming that he’s “dieting.”  Ok, in a year he’ll weigh 500lbs instead of 600, but that’s not a “cut.”
  • “Stimulus” that is nothing more than demand replacement.  We’re now up to more than 12% of GDP.  This is not a “bridge” to tide us over either – we’ve been doing it for three straight years and will be four by the end of the year.  This is a major problem as once this becomes part of what the economy “expects” it is no longer stimulative and results in people doing less work and expecting more “cheese.”
  • The promise to reduce spending (and raise taxes) “tomorrow” and “on someone else.”  There’s a 30 year history on this – spending decreases come never, tax increases usually do occur.  But this time tax decreases that were allegedly “temporary” (e.g. the Bush Tax cuts) wind up permanent (even among those who say they won’t support it, ala Democrats) and they even get added to – such as the FICA tax reduction!

We suffer from the utter inability of either political party to stand at a podium and tell the truth.  We cannot have $100,000 in income and spend $170,000+ a year.  Yet we have and we are.  Try this in your household and see what happens.  More to the point it is mathematically impossible to sustain any economic system where debt rises at a faster rate than actual productive output does.  This is fifth-grade mathematics and yet we have intentionally and willfully ignored it for thirty years.  There is not one politician from either major political party who will stand before the public and tell the truth on these matters.  Not one.

· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

In short: Stop lying, right now, or else.  “We said $4 trillion, we meant it, and oh by the way that was a down payment, not the total amount of reduction.  Care to try our patience again?”

To the “Tea Party” that was crowing about how they were “successful”, how does that success taste?  Half of your members in fact defected when it came time to vote, and despite the crows of “success” (which was really nothing more than glee over “beating the Democrats desire to increase taxes”) the bad outcome that you claimed to be trying to avoid happened.  Now what?

To the Democrats who said this was a “good bill” or even one “we can support”: How does abject failure taste?  Your refusal to admit that you cannot spend more than you take in on a perpetual basis and your incessant demands to spend more and more without any plan to pay for it, despite screeches of “tax the rich” and “fair shares” has gone nowhere.

To the “mainstream” Republicans who said this was “the best we could do” or even “a good bill”: How are you feeling this morning?  Got out of town in seconds after that vote did ‘ya?  Well gee, that worked out real well eh?  Now what?

Some more facts – and you’re not going to like any of them:

  • Within hours of the passage of the bill more than half of the authorized increase in the debt ceiling (the first tranch) was blown and gone as Geithner unwound all the screwball theft games he had played for the previous two months.  More than $200 billion instantly vanished.  The scale and price of his deception was instantly laid bare upon the table, as was our fiscal trajectory, since June is one of the heavy tax receipt months (estimated taxes.)
  • In calendar year 2007 GDP was $14.3 trillion, more or less.  The actual borrowing increase was $548 billion.  The Federal budget was $2.73 trillion.  To balance our fiscal house we would have had to cut 20% of the Federal government – in 2007.
  • In the last year GDP was $14.8 trillion, more or less.  The actual borrowing increase was $1,700 billion.  The Federal budget (which was never actually passed and signed, a rank violation of Constitutional requirements) was $3.8 trillion.  To balance our fiscal house we would have had to cut 45% of the Federal government – more than doublethe 2007 figure.
  • To bring the economy into balance debt must not grow faster than GDP.  In a time when GDP is shrinking debt must shrink faster, not grow faster.  This is basic exponential mathematics.  15 minutes with Excel will prove this to anyone’s satisfaction.  This has been the foundation of my perspective on the economy and our errors since I started pontificating in public on it in the 1990s while running MCSNet, and has been the foundation of The Ticker as well.  Twice in the last month or so I have posted links to Google spreadsheets for those too lazy to do it themselves, making it even easier to visualize what I’ve been talking about.  Anyone arguing otherwise must be able to demonstrate why the laws of mathematics do not apply and prove they are correct, and if they’re unable to they must be ejected from the debate on the path we take as a nation.

So for exactly how long did CONgress think it was going to get away with this?

Washington DC has turned into a bunch of sodomites and the American public and our currency are the victims of their serial abuse.  The alleged filibuster threat on the debt ceiling bill, which would have delayed passage (oh no!) turned out to be a bunch of hot air.  Sure, they had the votes for cloture but those threatening to force the vote never did so, so the threat was simple hot air – political theater.

Vote-buying with entitlements and other spending is an easy sport to engage in but it ultimately fiscally dooms a nation.  I have warned of this path for years, going back to the earliest Tickers, and pointed to how companies like Washington Mutual (and others) were doing it as well, paying dividends out of money they didn’t have.  This always ends in disaster, as it simply must – it is a matter of mathematics that when you continually spend more than you make you will eventually go broke.

To those in the economics “profession” who say that a sovereign that prints its own money cannot go broke, you’re technically correct and factually lying, and you know it.  Yes, we can print as many dollars as we wish, but doing so makes each dollar worth less in terms of goods and services.  The same outcome as if we didn’t print the money is inevitable – the “free ****” ends because the recipients all starve due to the fact that their “money” doesn’t buy anything any more.  When you’re in an economy that is reliant on the import of various goods (especially energy) this sort of destructive cycle is akin to sodomizing puppies and claiming that since they’re not people your sin (and crime) doesn’t count.

These very same “economists” all laud the “virtue” of free trade.  In fact it’s trade with economic slave-holders and there’s nothing “free” – or fair – about it.  China’s whining about the downgrade last night and this morning needs to be met with one response: Die in a fire – and if you try anything hinky, we’ll ignite the fire.  There is nothing innocent or victim-like about their role here; they were not only willing participants they have been exploiting the imbalances, stealing our intellectual property and abusing their citizens the entire time.  Bluntly: China deserves the skull****ing it is about to receive.

We must rebuild our labor force.  This means wage and environmental parity tariffs.  Yes, this means that Giganticus Corporatus will have a 15% pretax operating margin instead of 30% and its stock price will be $40 instead of $400.  So what?  There will be actual income generated by actual people here in the US building actual things instead of conspiring with one another on how to steal another $15,000 from a homeowner through serial refinance fees.  The former is a productive enterprise; the latter legalized extortion and theft.

We must fix the tax code.  Rip the damn thing up!  There are two rational choices: A flat tax with no more than three or four brackets and no zero bracket or deductions and The Fair Tax.  In either case capital formation must not be penalized and borrowing must not be incented.  This means that dividends must be taxed once.  Taxing short-term capital gains as income is fine (speculators should not be able to get a free ride) but the long-term capital formation (e.g. pick a period – 3 years sounds about right) must not be deterred.  The government could have taxed away the roughly $60,000 in cash that formed the base of MCSNet.  If it had the many millions in revenue, spending, payroll and taxes ultimately resulting from the formation of that capital would not have happened.

We must eject the illegal aliens in this nation.  I know neither side of the political aisle wants to, but that doesn’t matter.  At a time when we have a huge percentage of citizens out of work it is an outrage that illegal Mexicans are taking any jobs in this country.  Make our policy clear: Leave voluntarily right now, or we will find you, will lock you up, make you break rocks for five years and repave our freeways as your work while imprisoned, then deport you.

We must fix the health care system, not “Medicare” or “Medicaid.”  I have written on this extensively and it features prominently in Leverage (the book) as well.  This means an immediate end to the cost-shifting by providers, drug and device makers.  It means an honest debate as to what, if anything, society owes people in this regard and that subsidy must be transparent and paid for with current tax revenues.  If it cannot be, it cannot be provided.  Period.

We must have that same honest debate about all other government programs.  For each program the people want, they must be able to fund it with current tax revenues, and nobody can be exempt from paying something toward it.  Yes, some people will get more benefit than they pay in taxes – that’s the nature of such things, but those benefits that are intangible (e.g. national defense) are different than those that are direct and personal.  Nonetheless, no program may be funded and operated that we refuse to fund with present tax revenue.  Period.

Stop talking about “growth” being able to fix this mess.  It cannot.  From 1990 onward our average GDP growth has been under 5% and since 2000 approximately 4%.  But in fact all of that was false, as this chart conclusively shows:

Debt and GDP Change

We didn’t produce any of the so-called “economic growth” since the 1980s.  We borrowed more and more money to cover up the offshoring and shrinking of our productive enterprises here in this country!  That borrowing allowed us to continue to pretend we were making economic progress when in fact we were not.  Consider this: The 1980s and 1990s, which were all about the great “productivity improvements of the Internet and computers” we all heard about, were pathological lies enabled by leverage abuse.

We must stop this crap – right now, right here. 

Our politicians must stand and tell the truth: You were promised great things by government, but those promises were lies.  We didn’t impose taxes sufficient to pay for these great things, and worse, the tax money we did collect was spent buying votes instead of providing what we promised you.  We are all collectivity responsible for this – you for demanding that which you were unwilling to pay for, and us in continuing to lie to you for thirty years and enabling the fraud and leverage abuse that made the illusion of prosperity possible, along with bailing out the so-called “captains of industry and finance” that conspired with us to delude you.

Yes, this will result in a monstrous economic contraction.  That was unavoidable in 2000, but it was reasonable in size.  It was unavoidable in 2007 too, and was worse than in 2000.  Now it’s even worse than in 2007 by a considerable degree and the longer we wait to accept reality the worse it gets.  I’ve now got more than ten years of consistent, every-single-year history on my side – the claims of the “supply-siders” and “Keynesians” have not translated into a reduction or elimination of these imbalances, they have made them worse!

Stand up politicians, tell the truth, and deal with the consequences.

We are dangerously close to running out of options in this regard.

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