The Wrong Diagnosis

I post my thoughts and insights about breaking news items and other findings every day of the week, and often on weekends too, in a forum area for enrolled members.  Below is my first post of the day, which I thought would provide a good example of what's happening over on that part of the site.


Mr Practical, who posts his keen insights at minyanville.com, has this nice summary and diagnosis of the current situation (which I happen to share 100%):

If you add up all the government bailouts, explicit and implicit, along with actual government purchases of assets (debt from banks) it comes out to a surreal $30 trillion. Markets are cheering that things have “stabilized” and “things are getting less bad”. I ask you seriously when the government throws $30 trillion at the “crisis” (one which bankers are now claiming is over), can you call that stable? That is like declaring a patient being kept alive on a heart-lung machine healthy.

Of course we have stabilized. The government has bankrupted our future to do it. The government(s) control the LIBOR market, the swaps market, the bond markets with all the “money” they are printing. They are feeding “money” to banks under the table at an alarming rate.

Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.

The key issues are best examined at the most macro level these days.  If they do not make sense in total, then they do not make sense individually.

Does it make sense that a crisis rooted in debt can be solved with more debt?  If not, then you can safely ignore the details of the TASF, TALF, PPIP, et al., unless you are interested in tracking the theft and looting of public monies by insiders.  Then there is good sport to be had in the details.

Mr Practical continues:

Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it.

Right there, Mr Practical has named the very root of the predicament we face:  Growth comes from new spending, and new spending comes from new credit, and new credit represents more debt.  That, for better or worse, is our system.  Said another way, every dollar is loaned into existence. All money is debt.

As pointed out in the Crash Course, this means there is a problem baked right into the very system itself, because it is not possible for debt to increase exponentially forever.  Sooner or later it runs out of fuel (new borrowers, productive economy, or both) and then the system begins to unravel.  That's where we are today.

Jeff Nielson summarized this very nicely in an article in SeekingAlpha that was posted this morning.  He picks up on on one of the most-important yet least-appreciated facets of our current delusion (the fact that our GDP is padded with non-cash transactions - thank you, Jeff!) and builds towards the logical conclusion that we simply have too much debt.

As pointed out by Chris Martenson, in his own fantastic presentation, “The Crash Course”, roughly $2 TRILLION per year of supposed U.S. GDP is statistical “padding”. It is “deemed GDP”, where there are no dollars changing hands and no visible wealth being generated.

Strip away that padding along with the dramatic reduction in GDP caused by the Greater Depression, and we are left with a measly, $11 trillion/year in GDP. Please note that GDP is not the profits of an economy, merely an indication of economic activity.

Given that most U.S. debt is held by individuals and cooperations, and with long-term interest rates rapidly rising, just to service this insane mountain of debt will require something in excess of $3 TRILLION/year. This is more than 25% of annual GDP!

Obviously when more than ¼ of all economic activity is dedicated to simply paying interest on debt, then it is equally obvious that borrowing additional vast sums of money will simply make this ratio much worse. If this were not true, then no one would ever need to declare bankruptcy, they could just keep borrowing more and more and more – until eventually they “solved” their problem.

Is there anyone who still believes the Wall Street Liars, their servants in government, or the media-parrots, when they repeatedly assure one and all that increasing this debt far faster than at any time in history will “solve” the U.S.'s current economic nightmare?

The arithmetic cannot be contradicted. The “plan” of the Obama regime (and the Bush regime before that) is simply a guarantee of bankruptcy for the U.S. - with most likely a destructive episode of hyperinflation before the final, debt-implosion.

Where the US government and its Wall Street partners have decided that we suffer from a condition of too little spending, the alternative diagnosis says that we suffer from too much debt.  Given our debt-based monetary system, these are exactly diametrically opposed conclusions, and each implies solutions that are exactly in opposition to the other.

So if it turns out that we suffer from too much debt, and the wrong solution of MORE DEBT is applied, then we are making the situation worse, not better.  It would be the same as a drunk trying to drink himself sober.  

I hold the view that we are doing exactly that.  The crisis will only continue to get worse and surprise DC/Wall Street to the downside until we finally get a grip on what the actual problem is.  I am not holding my breath for that moment, as it could be a long time coming.

The hangover is going to be severe.

This is a companion discussion topic for the original entry at https://peakprosperity.com/the-wrong-diagnosis-2/

same as a drunk trying to drink himself sober
Seems so odvious - and never mentioned by the corrupt media.

Great post Chris. Is there a chance that the Obama Regime is aware of the fact that they are driving the country towards bankruptcy? And if so, is there a possibility that they want the country to go bankrupt? And why would they do that (any positive effects of bankruptcy) ? Questions over questions…

 30 trillion wow! Now there is a number we’ll never hear on CNBC , ( the real comedy network).
   Great article Chris, just proves again that " figures can’t lie but liars sure can figure".

                                                                         Bob

This is what Peter Schiff has been telling the media as many laugh at him. Hope he runs for the Senate.
One has to wonder if someone is trying to ruin this economy on purpose. Once failed it will be much easier for someones new agenda to be put in place.

 idoctor said:  "One has to wonder if someone is trying to ruin this economy on purpose. Once failed it will be much easier for someones new agenda to be put in place."
Yep.  You got it.   Only thing is, there agenda has been in place for a long time.

 

mailpankau said:  "Is there a chance that the Obama Regime is aware of the fact that they are driving the country towards bankruptcy?"

Yep.  Virtually everybody in the fed gov is on the same team now.  It’s the "Greed, cheat, steal, get-all-you-can-for-yourself and to hell with working folks Party.  And its funded and directed by the wealthy/elite/financial cartel.

Is there any reason to still have hope, given their extreme power, and our lack of it? 

Peter Schiff did an overview talk for Google at "Authors@Google: Peter Schiff"

http://www.youtube.com/watch?v=tU8jCa_dKTM&feature=rec-HM-r2

Fantastic post yet again, Cheif!
Suggestion: I really have a strong sense that a lot of folks don’t realize how much comes with enrolled membership. These days the home page doesn’t even have a direct "subscribe" link any more to sign up for paid membership, and I honestly wonder if newcomers to the site even realize there is a paid subscriber level with supported subscriber-only forum, enhanced video quality, podcasts, and all the zillions of other benefits of enrolled membership.

May I suggest that you collect a bullet list of ALL the benefits of enrolled membership and post it prominently on the sign-up page? I fear that a lot of folks out there think its just about Martenson reports, and there is so much more.

Just tryin to help…

Erik

 

[quote=ErikTownsend]
May I suggest that you collect a bullet list of ALL the benefits of enrolled membership and post it prominently on the sign-up page? I fear that a lot of folks out there think its just about Martenson reports, and there is so much more.

 [/quote]

You have to log out to see it…

https://peakprosperity.com/product/chrismartensoncom-enrollment

If you log out and try to sign up for the first time, that info is given in the format you suggest.

I agree that there is ample reason to enroll. Since Chris started the "In Session" thread a few weeks ago, I often leave a browser window open to that thread while I am working for the real time updates - priceless!

 

Nice post Chris.
I have a few comments:

  • Your statement "All money is debt" got me to thinking. Would it be more accurate to say that the US dollars in circulation up until the time the gold standard was removed were real and the dollars created after that is debt?  I know the "real dollars" are a small percent but this is how I tend to view it.  Is that a correct view?

  • I seriously doubt the Obama administration doesn’t know what’s going on.  I also don’t think they want to see our economy implode. (Sorry gang, but I’m not into conspiracy theories)… I just think they know they can’t do anything about it except put it off until the next administration.  Obama’s biggest asset is his ability to speak and get people believing in hope and the future.  Since a lot of the stock market and economy is based on confidence, he might do a great job of keeping people’s confidence up until he makes his impact in history and the economy is no longer his problem.

><>Larry

 Hi Chris,
Thanks, as always, for your insights.

I have been reading your blog for a while and you make sense of complicated information.  I overstand that recent and current economic policies are impoverishing the masses.  Who benefits from this crisis?  Money is not disappearing;  Where is the wealth going?  Thank you kindly for your light.

Glosta

Where does the $30 trillion come from? I thought it was appx 10.5 trillion
CNN Bailout tracker… http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

 

 

The $30 trillion is a world-wide number, $10-$13 trillion (depending on who is doing the counting) is a US number.

Thanks Mr Fri -

  1. There are no "prior dollars" floating around that originated while the gold standard was in effect.  Prior to 1913 dollars had the words "US Treasury Department" printed across the top.  After 1913 they all have "Federal Reserve" printed across the top.  Under the Federal Reserve's mandate. all dollars were/are loaned into existence.
  2. I agree that the current administration is seeking a favorable political outcome, just like all prior administrations.  Whether we individually agree with or support (or not) the policies of any given administration are somewhat beside the point.  Each political party is seeking a favorable or best outcome for their point of view at any given moment in time.  The closest I will get to this conversation is to say that I think that each party is far too focused on short-term "wins" that ultimately serve to undermine our long-term interests.  And. perhaps, I will also allow that this is not a particularly new phenomenon since we can trace this exact behavior back through the millenia.  It's just that this time we've never been faced with the profound need to solve a global energy and resource depletion phenomenon - there are no more "new continents" to move off to once the current ones prove unsatisfactory. 
 

i am open to being corrected but i think there were some dollars floating around that said silver certificate

 Reading Chris’s "Wrong Diagnosis" (super read BTW) and reading a lot of the comments really made me recall Greenspan’s article, circa 1966.
On an aside, he signed this for Ron Paul and told Paul he still believes in it. I suppose the markets aren’t the only thing that is schizophrenic these days.

Take care

 

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.  

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

 

Truth be said we could probably reword that to say: "But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so Ben and Timmy printed money out of thin air and devalued the dollar causing the great second depression. But they really meant to make things better, they just never heard what Alan Bartlett said about our solutions being our problems. Oh well.

 

Federal government stupidity staggers my mind. They have an income around $2 trillion and falling. Unfunded SS and Medicare debt of $60 ttrillion and rising. Bonded debt of $12 trillion and rising. $30 trillion in bailouts and rising. To top it off, Obama plans (for now) to spend $4 trillion for the nest fiscal year while borrowing $2 trillion to cover the defict. They are looking at over $100 trillion against $2 trillion, a debt ratio of 50:1.
They are brain dead idiots who repeat the same mistakes over and over again, only promising to try harder the next time. It is best not to look at them in isolation. No matter how I triy to warn others about this, it doesn’t penetrate. Worse, they get annoyed at me for being too negative. When I urge them to buy gold and silver, they think I’m unpatriotic.

Anyway, betting against popular opinion by investing in gold and silver is the safest and most profitible investment anyone can make today. This Friday morning, I see Comex silver and gold taking off like they were shot up out of a cannon. The recoil is driving the dollar down.

On this inflation/ deflation debate, I take the position that each is half right. Dollar assets have a long way to go down because of the massive unleveraging and fraudulent imaginary assets. Commodity assets (food, metals and energy) are going up as investors unload dollars for tangible assets. It’s a vice that’s squeezing consumers from two sides. These are the End Times for Western Socialism.

hi ray long time no see
i agree totally w/you except for the stupidity part. reason is there are people profiting mightily from all this and it hapens to be the ones in charge.

the following is a quote form the maestro himself

" new financial products-including derivatives, asset backed securities, collateralized loan obligations, and collateralized mortgage obligations…lenders have the opportunity to be considerably more diversifiedand borrowersare far less dependent on specific institutions for funds…they have contributed to the development of a far more flexible and efficient financial system"

this is from"greeenspan’s bubbles" by william fleckenstein.

people think it is stupidity because they think the purpose of the fed and the interests of the financial institutions are the same as their own and the government is looking out for the best interests of the people. once you give up that notion you do not have to buy into any conspiracy theory you simply look at results and see who benefits.

i highly recommend the book but read it with the idea that there is no stupidity involved. these people have been at this for centuries. they know exactly what they are doing.

Can someone help me understand the concept that "All money is debt?"  I understand that today the Fed creates money as it’s loaned into existence. That concept is clear.  What I’m not sure about is why money before 1913 is debt.  (And if it’s wasn’t debt, what happened to it.)

My thinking is that before the Federal Reserve came into existence dollars meant something.  One piece of paper equaled X amount of gold.  Or, one piece of paper equaled Y amount of work.  The paper was carried around as a convenience rather than carrying the gold.  That seems like those dollars are representing real items, not debt. So why are they considered debt along with the new dollars created after the federal reserve took over?

 

Actually there is something positive about bankruptcy. You get to wipe the slate clean and start all over. In the meantime you have a chance to divert money to being spent on some useful things. Not that the current stimulus package is lean or mean, but it does give a big push to a number of very critical items (renewable energy for one) that in a general austerity package wouldn’t otherwise have a chance in hell of getting funded.
I had some personal experience with country wide bankruptcy, having lived in Argentina from 1988 through 2001. We went through several periods of hyperinflation/hyperdevaluation, government seizure of private savings (twice, once in 1989 (or 1990?) and once in 2001), and a change of currency to boot. Besides the fact that they have had a string of incompetent/corrupt presidents, the country continues to be a relatively functional, developed place to live.

Maybe Obama is heading in this direction. I have read other blogs that suggest that he is stringing the conservatives/BAU group along to let them completely hang themselves. Problem for him is to dodge the bullets and not get dragged down too.