Wednesday, December 28, 2011

Around and Around and Around we go

I wrote this as a challenge on one of my favorite venues, Karl Denninger's market ticker.  Karl is right on, but off base, because these are surface issues.  The real issue is how can we fix what is broken?  In short, I describe why the fix won't be done, but will happen anyhow.  

Why do you keep messing with a broken and non-fixable monetary model Karl? They are doing the only thing they can do without allowing it to blow up or blowing it up themselves. Debt has to be taken out of the system. There is over $50 trillion in debt in the US and a monetary base of under $3 trillion. It is the mouse screwing the elephant syndrome.

It isn't just the crap on the balance sheets is mismarked, what is on the other side of the balance sheet doesn't exist without it. The balance sheet is gridlock. Write off the debt, bankrupt the banks, where do the deposits go? Where does the insurance go? Well, the government bails it out? With what? More debt. Writing a check for a bad check that has already been cashed. You can't even spend this stuff. This is not back in the Ghetto financing, where adding and subtracting work. We are talking about what is supposed to equal what doesn't equal. Once in awhile, the call comes in and guys like Corzine are found with their pants down. Need some money? Get some that has already been borrowed 20 times and borrow it again. Then let someone else borrow it and again and again. The hypothecation did that and rehypothecation did it again and again. The money in the accounts had been hypothecated several times when it got there, unbeknownst to the depositor. The assets in the banking system bad? What do you think the deposits rest upon? MF Global over and over, but they never mark to market.

Irving Fishers Debt Deflation Theory was right, but off base. You can't recognize what Fisher wrote as valid if you are going to solve the problem, because the debt and the media that was created with the debt are one and the same. There isn't any fooling with the Federal budget going to fix this problem. At best they are going to pump enough air into it to keep it from collapsing for awhile. Then, someone with enough power is going to ask the system to mark to market. This is why money builds up in Central Banks, as the banks that get the money in the course of business damn sure aren't giving it back to somoene who can't mark their books to market. Bankers aren't stupid and I believe some of them are ecstatic they got what they had out there back in 08 and 09.

You have to remember the game works 2 ways. Not only has the world spent 3 or 4 years income, but someone has put up that much income as well. What isn't in bank capital resides in deposits. In the scheme of things, other than the fact the economies of the world need to produce the return to support this much debt and equity (equity value is also dependent on debt service, otherwise it too is worth scrap at best), what do these figures mean?

The question should be, how do we support this much debt/equity and maintain any kind of growth? This is an important question because the world is organized around a pension system idea. The question should be, if people need to save so much for retirement, how can these assets be accumulated in sufficient amount to produce sufficient life income for retirement. If we liquidate, this is where the money will disappear. It has to. Where else it going to come from? Do we have another skittles crapping unicorn that is going to replace what don't exist?

The Genie is out of the bottle Karl. All these fucks in DC we see on TV, the idiot in the Fed are all merely ants on the log on the Mississippi at flood stage. The ant thinks, my motor must really be running good for me to be driving this log this fast. Watching the stage show in Europe should give people some idea how fucked the system is. One side over there has to realize their retirement is gone if they bail out the other side. It all exists by virtue of the other side, which is the paradox, which is why depressions are so hard to solve and why they result in war. It is kind of like the parasites that ride around with sharks.

I'm working on a piece called The Great Reset. It may be more of talking about the problem, but the problem can't be solved if it isn't understood. What is being talked about in public shows no understanding of the problem. I do believe Bernanke has a clue, my main problem being they didn't clean out the banks before he fired his bullets. You can't solve insolvency when the money going in keeps going out the back door. I must add that a bank making loans with no capital is counterfeiting. All this stuff is mere entries on a balance sheet and a capital account that reads zero must be funded out of what is left on the credit side.

Point being, we don't have a political solution to this. This mess is going to work itself out on its own, whether we struggle with it for 1 year, 3 years or the next 100 years. As long as you are less broke than your next competitor, you are probably safe on a day to day basis. There isn't anyone going to be piling into the Euro any time soon, Japan is a ticking time bomb and the USA is being run by a bunch of idiots that can't agree on anything, including a narcissist Commander in Chief. Funding performance of bad assets won't do anything other than unjustly enrich those that control these assets.

The first thing that government needs to do is end the portions of debt that are out of control. Public pensions that would cost $1 to $3 million to fund need to be recast. There are many websites of insurance companies that have annuity calculators. Go to one and plug in $50,000 a year for a 55 year old female and see what that stream of income costs you. The only way to reduce this is to raise interest rates, but the Fed has little control over longer term interest rates. What percentage of the typical corporate employee population has $1 million? Bet it is a small percentage and I bet few of them were guaranteed to have that much at their disposal. On any account, those won't be paid, at least not in a few years, because they can't be paid.

I think we agree the compound factor can't go on to infinity. It can't be stopped either or it implodes. Paulson was probably sincere when he talked about tanks in the street. The fucker should have thought about that before he and his cronies created the doomsday machine, but they may have been late on the scene. What has transpired over the past 40 years may have been all that could be done to keep the game going. Would it have been easier to have changed course 20 or 30 years ago? Maybe, but look at how rough of shape the world was in back in 1990 after deflating the US for 10 years. Trend deficits for 1990 were over a trillion if you went back to 1975, so the $200 billion to $300 billion weren't that far out of bounds. We made it about 20 years late.

There is going to have to be a haircut and it is going to have to be well thought out. We can't continue to replace the credit entries with more debt, which is what governments are doing. In the capacity of banking, recapitalization can only be done from the credit side of the balance sheet, which means monetary base has to shrink in order to recapitalize or debt has to be maintained. This means the accounts have to be haircut to form the new capital, either voluntarily or through bankruptcy. There needs to be a great reset.

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