"YOU HAVE BEEEN LIED TO AND REFUSED TO WAKE UP"

 by Karl Denninger

“Here it comes folks. For the last seven years I have been warning people, replete with example after example, about the fact that literally nothing was fixed after 2008. 2008 was a replay of the same scam that blew up in 2000, albeit on a larger scale.

Let's put some scale on this. The Internet bubble was a tiny piece of the overall economy, perhaps 2% or so. It was marked by abject fraud on a grand scale; the IPOing firms during the "go-go" years of 1997-1999 had collectively claimed some 100x global GDP in their filings as "projected" sales over the next decade or so. This, of course, could not happen as the economy of the globe was a tiny fraction of the projected sales yet it was both sold to you and bought by you, largely with issued (deficit) credit. When the truth appeared nearly all of those firms either failed or were cut to ribbons. Yes, there were some survivors, Amazon being one of the noted ones. But that some survived served as cold comfort when 98% of your portfolio was destroyed.

In 2008 we did the same thing with housing. I remind you that Residential Investment (housing) last quarter was $585 billion on an annualized basis out of $17,655 billion in GDP, or about 3%.  In 2007 it was $749 billion out of $14,233, or 5.3%. It has contracted by about 44% since that time, which of course implies that it was over-represented by (at least) that same 44%.

How was it over-represented? The same way the Internet bubble was over-represented, by issuing "funny money" loans to people out of thin air to "buy" things they had no prayer in hell of being able to actually afford on a permanent basis. In other words by fraud.

The so-called "fix" when a mere 5.3% of the economy faltered was to take the entirety of the losses generated by that series of intentionally fraudulent transactions and transfer those losses to you in the public through government deficit spending. Via this mechanism the federal government's "marketable" debt nearly tripled from $4.96 trillion at the beginning of 2007 to more than $13 trillion as of the end of 2014.

Let that sink in for a moment- over the last eight years $8 trillion dollars in value has been stolen from you and given to banks and other financial institutions (hedge funds, investment banks and similar) to cover up their insolvency. You were literally robbed in order to make their fraudulent deeds "money good" and this only encompassed a mere 2.3% of the economy, that being the percentage of GDP that came out of housing!

How is this possible given that 2.3% of the economy is a hell of a lot less than $8 trillion dollars? Simple: Leverage. That is, the financial institutions not only lied, committed fraud and induced others to commit fraud they also levered up their bets to an incredible degree, more than 20:1 to be precise about it.

Why does anyone care about Greece? Greece, like our housing sector, is a tiny piece of the global economy. I remind you that removing that tiny piece of housing from the economy was only a one time hit of about $390 billion if it had not been "levered" and instead "let go" yet you got a bill of more than 20x that much and it's still being added to on a daily basis.

What was sold to you after 2008 was that Dodd-Frank and other "reforms" would reduce leverage and eliminate this sort of game-playing. Nothing of the sort actually happened. If it had then nobody would care about Greece, but clearly people do. Just as with housing the same calls are being made.

Does anyone remember when New Century went bust- or the two Bear Stearns hedge funds in the summer of 2007? We were all told that housing was stable, that the banking system was stable and in fact Ben Bernanke himself said "subprime was contained." That was false and I argue that he knew it was false at the time, because Bernanke like all central bankers (and all bankers who actually understand banking; that would be most of the bigger guys) know damn well that it is leverage that allows big banks to make billions of dollars and thus exist as public companies; without it they are effectively public utilities and make very little money as they only have the spread between lending and deposit rates to exist on.

Greece, like the United States, believes that it can spend as a government money it does not first tax on an indefinite basis. This is false; such spending can be undertaken for a limited time when the survival of your nation is at stake, such as when you are at war, because if you fail to win said war there is nothing left to worry about in terms of your government or its currency. But at any other time you cannot do this and the reason is found in arithmetic: ALL compound, that is exponential, growth curves eventually run away from you. ALL of them look exactly like this if you go far enough out in time:

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That is a "mere" 5% growth rate, starting with "1" ($1 billion, $1 trillion, you choose) and extending out 100 years. Your $1 billion in deficits turns into $320 billion 100 years later. But what's worse is that in another 100 years it turns into $108,609 billion. What if the rate is 7% instead of 5%? Then in 100 years your deficit is over $800 billion and in 200 it's an unbelievable $703,674 billion.

This is the underlying fraud behind all such "compound growth" claims. It is one of the first points I put forward in "Leverage" and there is no getting around it. No such program is sustainable, ever, over the intermediate and longer term and all who promote such in any context are either lying to get you to "invest" and you will either lose your money directly or they will convince government to stick a gun up your nose and make their losses good at your expense.

We refused to learn this in 2000 and then again in 2008. We removed the constraints on bank behavior under Glass-Steagall when the banks intentionally violated the act in the 1990s with Greenspan's knowledge despite his mandate as a regulator to prevent them from doing so and then Bill Clinton retroactively repealed the law in 1999 after it had been openly flaunted for years. Less than a year later you got the bill for that crap.

Rather than put the law back Alan Greenspan instead compounded the damage and again the economy blew up in 2008, again due to intentional acts that the bankers knew could not work, as they all know exactly what an exponential growth curve looks like and that it cannot be sustained. We again got the bill as citizens and again allowed them to evade responsibility.

Now they've blown an even bigger bubble in both the stock and bond markets, along with national budgets such as in Greece, and it's about to pop. Not only that but we've built an edifice of such deficit spending on an indefinite forward basis here, in this country, and no political party will put a stop to it. I was told directly by the staff members of multiple Congresspeople during the debt ceiling "debate" that the Republican Party would not end deficit spending despite the above facts as to what inevitably must happen if it continues.

We are about to lose again because we refused to enforce accountability for either of the last two blowups, and today we are still refusing, choosing to argue about "gay marriage" and "guns" while the landscape for Fury Road is being literally laid before us.

The good news is that unlike Greece we can do it right now if we tackle the medical monopolies.  Destroying them using nothing more than existing anti-monopoly and consumer protection laws would drop the cost of medical care by some 80% and in doing so eliminate federal deficits and both our state and local government fiscal problems. It would also grossly contract that segment of the economy; there would certainly be losers but the vast majority of Americans would be winners.

Yes, doing this today would also cause equity values to collapse back to something sustainable- which is a hell of a lot lower in price than where they are now. But not doing so will lead to an uncontrolled contraction when, not if, the margin calls start as a consequence of our failure to put a stop to the levered bets made with non-existent money by financial institutions and governments hellbent on fraud and deception for profit.”

- http://market-ticker.org/