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Prepare NOW: They "Get It"
The Markrt Ticker ^ | 6-5-2010 | Karl Denninger

Posted on 06/05/2010 12:06:38 PM PDT by blam

Prepare NOW: They "Get It"

Saturday, June 5. 2010
Posted by Karl Denninger in International at 12:14

Anyone who doesn't believe that "they" (the powers that be) "get it" at this point needs to remove their head from their ass:

G-20 central bankers and finance ministers agreed in a joint statement today that “within their capacity, countries will expand domestic sources of growth.” At the same time, European Central Bank President Jean-Claude Trichet told reporters that Europe’s best contribution to the global rebound is to achieve fiscal sustainability.

Those two are polar opposites. You just heard Trichet admit that what everyone wants they cannot have.

Look folks, if you currently spend 11% of GDP by borrowing money and blowing into the economy to prop it up and you achieve "fiscal sustainability" (defined as not doing that any more) GDP will inevitably contract by the amount of stimulative borrowing you withdraw.

Geithner said at a press briefing today that “credible commitments to fiscal sustainability over the medium term” are needed to generate a durable recovery. Spain’s Finance Minister Elena Salgado said at a separate European press briefing that deficit reduction should come “no later than 2011.”

Game's up folks - that's six months out.

Look, let's be straight with everyone here. This is the current deficit additions for the first five months of 2010 (click for a larger copy):

That's nearly $700 billion in five months. Annualized it's $1.68 trillion. Last year's total was $1.647 trillion.

Ignore the CBO and other government claims. That which is borrowed is that which is owed, and the increase in that which is owed over a year's time is the true deficit in the budget, irrespective of all claims otherwise.

This comes out to roughly 12% of GDP. If we contract that deficit spending in 2011 to the European standard of no more than 3% of GDP then either GDP contracts by the difference (8-9%) or the government extracts that from you in the form of taxes.

Either way you don't have it - it is either not produced and thus not paid or it is produced and stolen. Irrespective of how it is achieved you are going to see roughly 10% of your "standard of living" come out of your hide.

It would be nice if it stopped there, but it both won't and can't. That which you don't have you can't spend, which means that the "excess capacity" in the economy goes up, not down. Employment will not increase, it will stagnate or get worse. Budgets will have to be slashed at state, local and federal levels - like it or not.

Rather than you taking it in the chute what should happen is what I described in my last post - that is, the fraudsters and scammers in the banking and "finance" industry who sold you, and the nation, on the premise of ever-increasing debt being sustainable, should be the ones who are put out of business at the same time.

Unless we the people demand that this happen it of course will not. The consequences of such a refusal will be profound and extraordinarily unpleasant, while those who caused this mess by their intentional and willful acts will continue to keep their ill-gotten gains.

Remember one thing folks - political promises are not debts. They have no standing in the line other than the willingness and ability to fund them. When that disappears, and it will, you will discover that the so-called "promises" you were made have the value of used toilet paper.

This is unavoidable, and no amount of bleating will change it. I wish there was a solution to this problem, but there is not. The promises made cannot be kept, not due to lack of political will but inability to continue to compound debt upon debt upon debt any longer.

We entered this downturn because people could not pay the debts they owed. We are still in this mess because people still cannot pay. The government attempted to shift those debts to itself, and now it is in danger of being unable to pay.

The Federal Reserve Z1 will be out on the 10th, and I will be updating the charts showing total systemic debt on that day. I expect they will continue to show contraction, despite the efforts of government to stimulate credit demand and thus continue the expansion.

That is the end game that leads to the Mises-style "adjustment" and there is nothing that can be done to prevent it.

The government has spent two years trying to stop the contraction by replacing private credit demand with public. The attempt to re-ignite private credit growth has failed, exactly as I expected it to and have repeatedly stated it would here on these pages.

All that has happened is that governments have now started to be unable to meet their debt commitments - so instead of businesses (and banks) going under, we now have the risk of governments going under.

The idiots in Washington DC and indeed around the world refused to recognize that they are the gnat on the horse's ass. If you look at the above chart you can see it clearly - Federal Debt is a small fraction of the total in the system. It is therefore mathematically impossible for The Federal Government to supplant and replace private credit demand and ability to pay. Something that is 20% of the whole cannot support the whole - it's that simple.

The sustainable long-run percentage of debt in the system is about half of what is now present. If we were to shrink "financial instruments" and "non-financial business credit" by 60% and household credit by about half we'd be in the upper part of the sustainable range.

That's where we're headed - whether we like it or not - as the government is reaching the end of its ability to prop this thing up.

The knock-on effects to GDP that will engender will be hideous. Just to go back to 2000's GDP would knock forty percent off. To return to a sustainable debt ratio on a $10 trillion GDP would require us to contract credit outstanding by some 55% - and that would put us at the top of the range.

I said when I began writing The Ticker that had we taken our medicine in 2001 we would have had to suffer a mild Depression - a 10-12% correction to GDP. In 2007, we would have had to suffer a 20% correction to GDP - roughly equivalent to The Great Depression of the 1930s.

I also said that if the government did what they've now done, the damage could easily be twice that bad, with a potential 40% decline in GDP in the cards.

Is there a guarantee that things will get that bad? No. But is it entirely possible? Yes, and if you believe not and want to expound on that in public you need to explain how your scenario can come about, given the clear mathematical evidence.


TOPICS: News/Current Events
KEYWORDS: cw2; cwii; debt; denninger; doommonger; economy; g20; gdp; gold; obama; recession; survivalism; survivalist; ticker
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1 posted on 06/05/2010 12:06:38 PM PDT by blam
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To: blam
Posted earlier:

G20: The Time For Stimulus Is Over, Long Live Fiscal Austerity

2 posted on 06/05/2010 12:09:14 PM PDT by blam
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To: blam

You are so filled with good news.


3 posted on 06/05/2010 12:15:06 PM PDT by Repeal The 17th (Eastern Time: 5 am-4 pm coffee. 5 pm-10 pm beer. 10 pm-5 am sleep. Rinse and repeat.)
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Comment #4 Removed by Moderator

To: blam

bump


5 posted on 06/05/2010 12:18:17 PM PDT by VOA
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To: blam

Saw many of the ‘progressive’ pundits chiding the EU for adopting austerity instead of spending their way to prosperity like we did!

This isn’t going to end well.
But do not think this ‘collapse’ whatever shape it takes isn’t, I repeat, ISN’T the objective. And all the while they’ll tell you that capitalism was the culprit, when what you are witnessing is the death debt spiral of the welfare state.


6 posted on 06/05/2010 12:21:16 PM PDT by griswold3 (Barack Obama’s First Law of Leadership: “I just work here.”)
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To: Squantos

I’m with you Squantos!

Be Ever Vigilant!


7 posted on 06/05/2010 12:23:56 PM PDT by blackie (Be Well~Be Armed~Be Safe~Molon Labe!)
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To: blam

bump for reference


8 posted on 06/05/2010 12:24:36 PM PDT by EverOnward
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To: blam

Yes. A 40% decline in GDP has a corresponding decrease in the tax base. Hausers Law...no greater than 19.5% of any US GDP by year has ever been collected in the US no matter what the tax formula was. The fate of 308 million people is not sustainable with a 40% decrease in GDP. Have figures been published yet as to how far the tax receipts of April 15th 2010 have fallen from 2008? In 2009 they had fallen about 20% nationally, and a similar amount for the states in 2009.


9 posted on 06/05/2010 12:26:07 PM PDT by givemELL (Does Taiwan eet the Criteria to Qualify as an "Overseas Territory of the United States"? by Richar)
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To: Squantos

” .....6 months from everything ! “

A system that’s grown this massive - and has a tremendous, but unquantifiable, amount of inertia, which makes projections and timelines unreliable, at best...

Don’t start eating your grocery stocks, just yet... ;)


10 posted on 06/05/2010 12:28:21 PM PDT by Uncle Ike (Rope is cheap, and there are lots of trees...)
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To: blam

Prepare how?


11 posted on 06/05/2010 12:33:32 PM PDT by BenLurkin
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To: Squantos

Yep, the crap is rising ... fast.

Fully stocked here.


12 posted on 06/05/2010 12:37:20 PM PDT by Tarpon (Obama-Speak ... the fusion of sophistry and Newspeak. It's not a gift, it's just lies.)
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To: Uncle Ike; blackie

Good points.....but its a lifestyle versus a reaction to the times. Self reliance is old hat for us....


13 posted on 06/05/2010 12:38:00 PM PDT by Squantos (Be polite. Be professional. But have a plan to kill everyone you meet)
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To: blam

Jars and fruitflies.


14 posted on 06/05/2010 12:38:23 PM PDT by Psalm 144 (Let me be clear. The voluntary pancipation of Cinco de Quatro is mandated in all 57 states.)
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To: blam

Got me a case of chili and a case of ammo.


15 posted on 06/05/2010 12:42:06 PM PDT by ozzymandus
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To: Squantos; Uncle Ike

Just hang loose, be prepared and Be Ever Vigilant!


16 posted on 06/05/2010 12:45:16 PM PDT by blackie (Be Well~Be Armed~Be Safe~Molon Labe!)
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To: blam

Most of this article is a fairly straightforward description of the Socialists — here and abroad — finally running out of other people's money. We always knew it had to happen; well, here it comes.

But the article also contains this fairly bizarre statement:

what should happen is what I described in my last post - that is, the fraudsters and scammers in the banking and "finance" industry who sold you, and the nation, on the premise of ever-increasing debt being sustainable, should be the ones who are put out of business at the same time.
I call it 'bizarre' because blaming bankers for people borrowing money is like blaming Smith & Wesson for armed robberies. Used responsibly, the products are good and necessary things.

It's even more bizarre when the problem is government borrowing. C'mon, we know what causes government overspending: voters. It's the voters who think that 'federal funds' are the equivalent of 'free money', and who continually support politicians who promise endless free stuff. Bankers are responsible for that? I don't think so.

To top it off, the author contradicts himself several paragraphs down:

The sustainable long-run percentage of debt in the system is about half of what is now present. If we were to shrink "financial instruments" and "non-financial business credit" by 60% and household credit by about half we'd be in the upper part of the sustainable range.
Here the author agrees that ever-increasing debt can indeed be sustainable... you just have to keep it at a reasonable percentage of your GDP as your economy grows. All profitable corporations do this; the only reason a government can't do it is that the voters will toss out politicians who refuse to keep the freebies flowing.

Since the quoted paragraph makes no sense, is contradicted by the author's later comments, and in the end does not even advance his argument, I have to conclude that it's in there as populist noise... the author thinks that readers want to hear some "bankster bashing," and he's gonna tell them what they want to hear.


17 posted on 06/05/2010 12:46:27 PM PDT by Nick Danger (Pin the fail on the donkey)
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To: Squantos

” but its a lifestyle versus a reaction to the times. Self reliance is old hat for us.... “

Yup - during the dot-com bubble, when I stepped back and looked at things and realized there’s no ‘there’ there, I started thinking about how to deal with life in the coming hard times - and came around to the determination to convert my lifestyle from ‘consumer’ to self-reliance...

It’s taken a dozen years, but I’ve gone, in gradual steps with many false starts and course corrections, from urban apartment-dweller to country-living gardener...

I’m not where I want to be, yet - but I’m a lot more prepared than I was in 1997....


18 posted on 06/05/2010 12:47:31 PM PDT by Uncle Ike (Rope is cheap, and there are lots of trees...)
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To: ozzymandus
I need to grab a couple cases of Wolf. (the ammo, not the chili, LOL)

My AKs eat a lot of the stuff, and I've let my ammo stocks run too low.

19 posted on 06/05/2010 12:48:11 PM PDT by SIDENET ("If that's your best, your best won't do." -Dee Snider)
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To: blam

BLOAT!


20 posted on 06/05/2010 12:50:06 PM PDT by 2ndDivisionVet (Don't care if he was born in a manger on July 4th! A "Natural Born" citizen requires two US parents!)
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