I wrote this on market ticker somewhat as a sarcastic response to what Karl Denninger, the host of the site said in response to another poster. I have been wanting to write a post labeled "They Have Been Sucked Dry" and this would a good part 1 of such a post. Guys like Krugman are probably right, if you could keep a straight face and let the government spend $10 trillion extra a year, but that would be absurd to say the least. The world can't exist in absurdity for long, as nature will correct such an error.
Oh no they don't. The wick burns at the same speed irrespective of your dreams. Just as with economics and fundamental math, the speed of a cannon fuse's burn is controlled by the formulation of the powder in it, and nothing you can do - including dunking it in water - changes it once it's lit.
I beg to differ some on this. I held and lit enough fire crackers when I was a kid to know that some fuses suddenly went off. This is known today by the term, the shit has hit the fan. We will wake up one day and suddenly realize the bomb has gone off. I think it has already happened. Some days, I realize what is coming and start looking for a place to hide. There may not be one.
Some people keep looking for an event. Creditanstalt wasn't an event.
What caused the Great Depression was the same thing that is going to cause the depression they are hiding from us right now. That is pretending that bad assets or loans are good assets. Creditanstalt merely was the first crack in the dam to go. The mises.org site has a little book called "The Bubble That Broke the World". I don't know really how accurate the book is, but it discusses a series of actions that were intended to cover up the debt that couldn't be paid, namely the British and French war debts, which were being covered up by the German reparations. The US was loaning money to Germany so they could pay France and Britain so they could pay the debts to the US banks. The US got in the war so they could loan money to Britain and France. One bad debt to cover up another bad debt.
The purpose of all this lending was to finance the big trade surpluses that gave the appearance that the loans the the US were good and the bubble in the US stock market was real. Japan ran into this same mess in the late 1980's, where their bubble was supported by ever growing balances of trade with the US. The US caught cold in a credit crunch in the late 1980's and the Japan bubble broke. The Great Depression was worst in the US, because the US depended on the trade dollars for its economy. These trade dollars would have never materialized if the pretend and extend mess hadn't have happened in the first place.
The roles are now reversed. China buys US bonds because it has a dance to maintain. Revolution in China is probably the alternative. If China refused to buy bonds, what would they do with the trade dollars? They would have to spend them, thus possibly wiping out the capital they need to acquire to modernize their economy and support their own phony debt pyramid. The same holds true with Germany, which exports more goods than any country in the world. What is maintaining Germany's exports? Loans out of German banks to the customers of German corporations, most likely. The debts of Italy, France, Spain, Ireland, Portugal, the United States and Greece among others are the result of the big surpluses run in Germany.
There are lit fuses all over the planet. Consumer credit is rampant in Brazil at rates that compare to the paycheck and title loan sharks on every corner in America. The TBTF banks around the world are all being supported on pretend and extend accounting. The solution is to loan governments money to support the economies to support the cash flow to the banks so they can cover up the fact their assets aren't good. One of them will blow and they will be blamed for the systematic insolvency that permeates the entire system.
There seems to be a lot of fingers pointed at LEH. Do people forget that FNM and FRE went broke. That AIG went broke. That Citi was broke. That WAC was broke and most likely the other banks. That MER was broke and that most of the banks in Europe were broke as well. The insolvencies were probably in the tens of trillions, not in the couple of trillion that has been throw into the pot.
The purpose of this mess isn't only to kick the can down the road, but to cover up the crimes of the system. Had they gone through the banks in 2009, how many of these bankers would have not been put in jail or at least had evidence that they should be in jail? I would venture there are plenty of regulators as well that are guilty of wrong doing and would have been swept out into the street. But, the real fact is that the system under which we operate would have been laid bare as faulty and because it is the system devised by the political class and the elite, that wouldn't have played well on main street.
The problem of all of this is the assets of the intermediaries are the assets of the customers as well and the liabilities of many that can't pay. It is okay if Joe takes a haircut, but I want my damn money. That is the thought process of the average person and you can't blame them.
I doubt the typical financial asset is worth 10 cents on the dollar if it had to be set up and valued to operate in a sustainable credit world. The system is geared to mass mismanagement and not to the capacities of sound business and personal finance practices. The only thing that keeps most of what operates out there afloat is prolifigate credit extension to many that can't pay. This, of course, includes the governments around the world.
At what point does sound reasoning move to sound reasoning from fantasy land? Is there any sound reasoning that can follow the statement I heard Obama make last week, "that responsible countries pay their debts", so "Lend me another $2 trillion so the US can pay theirs"? The man is either a trained liar or totally delusional. The US ran up a big debt after world war II, but in doing so, it enriched its citizens with the debt itself. Time had liquidated the debts of the depression. This is not true today, as the debts being taken on by the US government are an attempt to make good the debts of the people, the inflated values of real estate and stocks and the international trade and debt game that has already been financed beyond reason. At some point, we are going to wake up to find the fire cracker that was barely lit the night before has gone off in our hands.