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A few minutes ago President Trump said deficits are out of control.

He's right, of course.

In point of fact the real deficit increase was $1.4 trillion last year.  How do we know this?  Because debt to the penny (an official Treasury site) tells us exactly how much the federal government has "borrowed."

I put "borrowed" in quotes for a reason: Banks, including the Fed, do not actually lend out deposits that were previously made.  Instead what they do is push a button, credit your account and cover the reserve requirement when the money is spent and someone else deposits it.

As such borrowing by the federal government, which is not backed by collateral that has already been made and is removed from the market until said loan is repaid, always and immediately creates monetary inflation.

You cannot control where this shows up in prices but that it does and always will is a mathematical fact.

Last year GDP was operating at about an $18.7 trillion in the third quarter (when the total deficit increase was totaled as well; Sept 30 2016.)  This means that approximately 7.5% monetary inflation occurred last fiscal year.

How much was the stock market up during that time?   From 1951 -> 2168 (S&P 500), approximately, or roughly 11.1%.

Or was it?

No, it was actually up 11.1 - 7.5% in real terms or 3.6%.

What happens if the deficit goes to zero.  Then the market at best grows at about 1/4 of the rate it was before.

This, of course, assumes the stock market got an average benefit from that inflation.  In point of fact it probably got a much larger than average benefit.  Why do we know this?  Because corporate profits have not been accelerating materially and the market is now trading at crazy price:sales ratios -- which have only been seen before in the near term before serious corrections or even crashes.

So again -- what do you expect to happen if the fuel that has driven the market up disappears?

You might want to start thinking about that.

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2017-02-20 06:00 by Karl Denninger
in Health Reform , 716 references
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It seems some of the state AGs might be reading my postings.......

But now generic drug executives can expect to face tougher legal repercussions, as evidenced by two federal court lawsuits filed late last year—one in November brought by Eatontown, N.J.-based Heritage Pharmaceuticals Inc. against two of its former executives, Jeffrey Glazer and Jason Malek, using the Racketeer Influenced and Corrupt Organizations Act (RICO), and one in December that 20 states have filed against six companies, including Heritage, after a major antitrust investigation by the state of Connecticut.

Racketeering and Anti-Trust eh?  Gee, that's a good start.

Now go after the hospitals and diagnostic centers and you'll really make progress.

Let me give you a hint: It takes 30 seconds to find a bill from a hospital that has a 90% discount for a certain "insurance."

There's extortion ("buy this insurance or be bankrupted if you need our services") and incidentally an illegally-tied sale (anti-trust again) -- and probably Racketeering there too, since the hospitals are all doing basically the same thing and if you can find a couple of people who are "in on it", well....

This crap has been illegal for over 100 years and yet nobody has been willing to bring charges and suits.

Until now, and at the state level. 


Do it and you get your face on Mt. Rushmore.
Don't do it and you have a failed presidency.

(Yes, I'm aware of the short term economic impact from doing it -- and it won't be pretty.  However, that won't last long, and the intermediate impact will be growth rates we haven't seen since right after WWII.)

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2017-02-18 06:00 by Karl Denninger
in Editorial , 2068 references
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I'm roaming right now, and what I see is, well, disturbing.

Man came from ape, right?  Sort of, anyway -- whether you think God did it or Darwin was responsible, the path is mostly the same.  We argue agency, not outcome.

But what the hell has happened to people in the last 50ish years?

People of WalMart is supposed to be a spoof.  It's not.

People I knew who I haven't seen in 20, 30 years -- my God what happened to you?

I find old pictures, and gaze at them.  We all get older, we get some lines to our faces, our hair is more-gray, and similar.  But gee, is that it?  No.  And both you and I know it.  And that's just the physical side of things.

We have a divided nation.  Half wants to kill the other half.  More than a few actually mean it; it's not a metaphor, it's a desire.

"Let it go"?  You can't be serious.

If the change comes slowly among those you hang out with you don't really recognize it.  If you walk into a scene you haven't been in for the last 20 years and see the change "all at once".... well....

"I need a drink -- or six -- now" was my initial thought.

The next thought?  Sell everything, buy some land away from all this crap, put up a block house, get some chickens and goats and **** it all.


What the hell has this nation turned into?  It may have happened more or less slowly, but it's happened.  Yes, there are normal people left.  But how many?  In big cities, where the population is centered?  Good luck.

You may know that there's a "dystopian" video floating around out there that basically says that the big cities turning into literal hell is not fiction, but inevitable.  It's a government video.  I would poo-poo it except.... I'm seeing it right now.

Oh my.

Prayer is not only inadequate, it's idiotic at this stage.

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2017-02-16 05:00 by Karl Denninger
in Technology , 349 references
[Comments enabled]  

There is a common - and wrong - premise that "first mover" is an advantage.

Of course it is at the outset.

But it only continues to be if you continue to be the first mover -- that is, you always have "the outset."

As soon as anything you do becomes a commodity then "first mover" = first loser.

The reason is simple: You are the first one to buy the hardware and service necessary to do X and you get stuck with it on a depreciation schedule where the new entrants a year or two -- or five -- later get to buy the next few generations down the road which are more-efficient and far cheaper.

Thus on your "COGS" line -- cost of goods (services) sold -- you get murdered.

Witness Verizon.  Verizon was first mover to deploy LTE.  Unfortunately that means they got stuck with a bunch of older LTE gear that could not cleanly integrate with newer advanced services and was more expensive than the next versions that followed.

Verizon had a major market advantage -- for a while -- as a result.  AT&T went second trying to catch them.  T-Mobile came along after the first-generation gear was obsolete, put in second and third generation gear and is now murdering them with a lower cost structure and thus the ability to offer lower prices.

Who's winning?  T-Mobile.

That's not because Legere is a genius.  He's a brazen *******.  But by not being first he got the cost advantage as the market moved toward a commodity offering and now he's tattooing Verizon and, to a lesser extent, AT&T.

Sure, Verizon has coverage in more places than T-Mobile but that advantage is dwindling fast. They're now getting close to AT&T's coverage, and more-importantly in most cases they're both faster and cheaper.

A couple of years ago T-Mobile's coverage was vastly inferior and they had a lot of EDGE or even GPRS service -- woefully slow.  Now most of their network is LTE capable and it typically outperforms -- frequently by 2x and sometimes by 10x -- the speed of either AT&T or Verizon.

How can they do that and offer "unlimited" service for $70/month when nobody else can and does?

Simple: They weren't first and aren't stuck with depreciation on older-generation gear.

Now here's Amazon's problem: Their AWS service is largely comprised of older, "first mover" equipment.

Yes, they are deploying newer.  But that older stuff will be on their balance sheet and in their data centers for years under IRS depreciation schedules and they have to recover the cost of it.  The newer entrants do not have to do this since they were not first.  They installed hardware that is faster, costs less and consumes far less power (which you pay for twice in a data center -- first for the power, then again to remove the heat via your A/C bill.)

Don't underestimate the power and efficiency issue.  It's very, very real, as is the cost issue. A number of years ago a previous-generation Xeon processor in the primary server here cost many hundreds of dollars each -- just for the chip.  Now?  I can get pulls of a chip a generation further down that is both faster and has the built-in AES instruction set for $15.  Yes, I did, of course - around two years ago.

Today I could buy a replacement system board for a few hundred dollars that would consume less than half the power of the one that's in the case now and is much faster!  But that new board needs new RAM, which makes the cost even higher.

And this is where the problem lies for the existing installed base: It's prohibitively expensive to toss all that older stuff in the trash -- it still works and the capital cost of tossing and replacing it is large.  While MACRS rules have helped (reducing what was a 7 year depreciation schedule to 5) five years is a damned eternity in the computer world and the power and performance structure of newer units is likely to leave you disadvantaged to the tune of 400% by the time five years runs!

In point of fact I had quite a go-around with the accountants in the time of MCSNet that for a lot of gear that we owned we should be able to basically expense it since it had a useful operational lifetime that typically failed to span even two tax years. They told me I'd go to jail attempting that with the IRS......

This means that AWS has a natural disadvantage in cost structure that they cannot evade.  Witness places like Digital Ocean that offers virtual servers for $5/month.  Yes, really.  My secondary DNS has been over there for more than a year.  The storage is all SSD.  The prices are, well, insanely cheap.  Instances are easily spun up and torn down and can be as standard as you'd like.

Why is that service there instead of on AWS?  Because I couldn't approach Digital Ocean's pricing on AWS.

Folks, this isn't magic, and Bezos isn't immune to it.  Neither is Microsoft or IBM.  It's fact and it's a huge problem with any service that gets turned into a commodity.

Does it make any sense for firms that are "riding the cloud wave" to be getting the sort of valuations they are under this fact?  Hell no.  That reality inexorably turns into margin compression and when it does the alleged "value" in these offerings that the market is "pricing in" turn into a big pile of flaming dog****.

Don't be there when it happens.

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2017-02-14 09:10 by Karl Denninger
in Corruption , 757 references
[Comments enabled]  

There's a lot of crazy in DC.

Most of the time crazy is the order of the day in that town.

But the Flynn fiasco is not in the crazy train mold.  It's real, and it's trouble.

As a private citizen, and not in possession of classified information, Flynn is entitled to discuss whatever he wants with whoever he wants -- up to a point.  That's this thing called the First Amendment, and it applies to people who advise the President but are not formally part (yet) of a Cabinet or otherwise "in" government.  I remind you that Trump, as President-elect, was not yet President.

The bad news is that there is an actual law on this -- the Logan Act.  It was passed in 1799, believe it or not, and it provides that nobody other than "authorized persons" may discuss policy with foreign governments.  Since the Executive is exclusively charged with conducting foreign policy and Trump was not yet President, nor was Flynn yet a Cabinet member, it certainly applied to him.

There are several problems, however, with the act -- the biggest being this pesky thing called The First Amendment.  I will note that nobody has ever been actually prosecuted for violating this act since it was passed -- and that may be why.  I will note that during Obama's term a bunch of Senators published an open letter to the Iranian government regarding an active and real controversy (Iran's nuclear program) and specifically stating that Obama, of course, had a limited time remaining in office -- never mind the fact that what he negotiated never passed the Senate as a formal treaty.  They were not indicted.

So what's the correct read on this?  Probably not that Flynn broke an actual enforceable law, because I suspect the Logan Act is unconstitutional and the government knows it.  They have never actually tried to lock someone up using it because they're pretty sure it will be challenged and spiked if and when they do.

However, this leads to two more problems.  First is the bludgeoning of people with threats to enforce a known unconstitutional statute.  That sort of thing is itself a crime, under 18 USC 242 (violations of civil liberties under color of law or authority) and also a civil cause of actual (42 USC 1983.)  Yet nobody is ever indicted and prosecuted under that law and the only people who can violate that law are those who are government employees of some sort -- by definition!

The second problem, however, is the lying itself.  That's always a problem.  This incident almost-certainly doesn't rise to any sort of criminal standard, because Flynn was never questioned under oath -- and his post is not subject to Senate confirmation.

There are those who are involved in a screamfest about the fact that "someone" (probably the CIA) monitored the phone call and that this information got out.  Well, the "got out" part may or may not be a problem (in other words, the motivation for that is to be determined, and it sure smells bad) but the monitoring part is both expected and routine in this sort of circumstance.

Conversations across a national boundary in which one or both parties are not US citizens enjoy exactly zero protection against "diplomatic" interception -- and that's a fact.  Not only is it a fact with regard to the United States but it's a fact in regard to virtually every other nation and its spying apparatus as well and this fact is as old as nations are themselves.

So give me a break on the screaming about that which has no reality behind it.

Does this mark "the beginning of the end" for Trump?  I doubt it.

But don't think for a second this doesn't indicate a serious problem -- it does, on two counts.

First, what sort of mental midget has a sensitive conversation on an open, unencrypted channel into a foreign nation with someone in their government -- and especially when that nation is Russia?  You have to be an utter imbecile to not fully expect that conversation to be intercepted and recorded.  The stunning lack of concern for OPSEC is beyond outrageous and reaches right up into Trump and his choice of Flynn.  To top that off you have him lying about it, which means he really thought he got away with it!  Flynn's actions brand him as a ****ing idiot who has no business anywhere near anything sensitive, say much less classified -- period

Second, it does call into question whether there was, or was going to be, a blackmail potential within his advisory chain.  That is a problem, and a very real one, if it exists.

Don't think for a minute that DC doesn't run on that sort of crap.  May I remind you of Dennis Hastert, who was Speaker of the House while concealing the fact that he apparently diddled some boys before entering Congress and then paid off one of the alleged victims later on.  I don't care that he paid off the victim, and I find it amusing that he got busted for structuring financial transactions to try to avoid detection of the payoff.

But there is utterly nothing amusing at all about what appears to be factual, and that is that Hastert was in the position to and did choose what bills came to the House Floor and were passed, and those that were killed, during the time in which material information on his alleged diddling of little boys was hidden from the public but known to certain others who were thus able to use that information to shape American policy and law.

We have no way to know if that did or didn't happen, and I will note for the record that exactly nobody has investigated that series of events to find out exactly what laws were passed, or not passed, as a result of Hastert being blackmailed.  It's possible the answer is "none" -- but the fact there was a very real opportunity and that Hastert later paid off the kid means that the question remains open.

Why hasn't that been looked into?

I'll tell you why not: For the same reason that zero felony indictments have been leveled against the medical industry over what appear to be blatant 15 USC Chapter 1 violations -- a law that carries not only ruinous civil penalties but felony criminal penalties as well.

If you think this lack of indictment activity across nearly 40 years since the US Supreme Court killed the hope of "immunity" from same (in 1979) is some sort of "coincidence" you have an IQ smaller than my shoe size.  The overwhelming evidence is that said lack of indictment is in fact because too many people have ordered a very-illegal pizza, or something similar and equally bad yet it is concealed from public knowledge and thus they can be blackmailed with same and have been.

That, folks, is where you ought to focus your concern and attention when it comes to Flynn, and whether we dodged a bullet by getting rid of him or whether attempts, successful or not, had already been made to use that leverage.

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