Let's get down to brass tacks folks, because if we don't pick 'em up, we're going to wind up with them in our feet.
Partisan political hackery is a time-honored and shopworn reality in America. Those who think that we are seeing something "unique" over the last few years need to read more history: Politics has always been a blood sport at least in the spirit and occasionally in the flesh.
But there come times when this sort of game is simply no longer acceptable. When the facts no longer permit the sort of game-playing that we have become accustomed to, as we simply can't afford it.
December of 1941 was one such example. There have been others through our history.
This is one of those times.
To those who want to argue over the political aspects of our current economic malaise, have at it. But realize what you're doing: By playing to the 50/50 split wedge issues that our nation is known for, you're scoring political points by screwing your children.
Make no mistake folks -- that's what you're doing.
If you haven't read or understood the Ticker I posted earlier and have pinned, go look at the topic list and do so. It covers the arithmetic of exponents, which is what's governing what is going on right now. We cannot avoid the facts and we are about to hit the wall.
I had a business lunch yesterday and we got onto the subject of companies we had each run and been involved with. At one point I made the comment that the use of leverage in business is incredibly dangerous and most of the time unwise. He differed with me, arguing that while it certainly magnified losses, it also (of course) magnifies profits.
Like so many others, including most today, he didn't understand intuitively what leverage actually is.
It's a compound -- that is, exponential -- function.
We live in a finite world. This means that leverage can be used successfully but in order to do so you must always employ it with an intent from the outset, continually executed, to decay it over time.
If you don't -- if you design your use of that tool to continue to use it on a forward basis -- you will find out about the ugly side of the game: This choice will result -- every time -- in a brick wall appearing in front of you, and due to the nature of compound growth it usually appears when it's too late to stop before you hit it.
This is not because you're stupid, it is not because you made some minor tactical error and it is not because you overlooked a detail. It is because compound functions always behave this way -- it is a mathematical certainty.
Therefore, if you do not design your use of leverage to continually decay toward zero it is mere luck that allows you to exit your position and keep the money before the wall inevitably appears and destroys you.
Go sit at your computer and pull up Excel. Prove this to yourself. Take a starting value and then multiply it by, say, 5%. Then compound that by extending down the series, and graph the result.
Note that the curve "runs away."
Now set the "growth rate" to any positive value you wish. The same thing inevitably happens.
If you don't have Excel handy look at it here: https://docs.google.com/spreadsheet/ccc?key=0AvNl3gDTsQT4dDNSZzNlQW1WU1hHMEh3QUhlY0xSeVE
Go ahead. Play with it. The compounding rate is in column B1. We start with $10 and go just 100 years. Set the compounding rate to anything you'd like that's positive (1-dot-anything) But of course the world doesn't end in 100 years. Your life probably does, but the world does not. And remember, your children will be here after you're gone. (If you use a very small compounding rate extend that table and the chart down to 200, 300 or 500 years -- you'll see that I'm right about the inevitability of the outcome.)
Every time you use leverage in any transaction you are using this principle.
If you do not design that use of leverage to reduce itself over time to zero -- that is, you attempt to run continual compounding, no matter what you're doing -- you will eventually hit the wall each and every time. The higher the compounded rate you use the shorter the amount of time you have before you lose control.
Now set that ratio to something "reasonable" (according to, for example, Paul Ryan with his "budget proposal") -- say, 5% (1.05)
Notice that this predicts that the $10 in GDP will grow to over $1,200 in 100 years, or a multiple of 120 of the original value. We have a $15 trillion economy at present. You multiply it out and tell me if you think that projection is reasonable.
Note that Mr. Ryan's proposal (claimed to be "a reasonable alternative" by the right) had a 40 year timeline, at which point the projection would be that $10 would grow to $67, or that $15 trillion in GDP would grow to over $100 trillion. Reasonable?
Maybe. But notice what comes next - in about another 12 years it doubles again. And again in another 12.
THAT is the problem, and it means that if you detect that you're "out of money" (or "out of ability to pay the interest") when you've consumed, say, 90% of your capacity to pay you're literally about a year away from being screwed - and this is at a 5% growth rate!
What if you're running 7%, which is what our debt accumulation has been since the 1980s on an approximate basis? When you get to the 90% point you have less than one year before it all goes to hell.
Guess what? The Democrats refuse to face this too. They claim we can't cut those "benefits" and "expenses". But arithmetic doesn't care whether you agree or disagree with the outcome -- it just is -- and the Democrat answer is "ignore the problem and it will go away." No, my friends, it won't.
What did you learn in 2007, if I may ask? We got our first actual "warning" in 2007, right, with the Bear Stearns hedge funds. How much time did we have?
Do you still want to argue with the math and what I've been trying to point out for the last four years?
We don't have time for the partisan games any more folks. This is a national emergency and it's both the Democrat and Republican's fault. It's also our fault for demanding that political promises be made that we should have known could not be kept.
But we did make the promises and the politicians on both sides of the aisle lied. When faced with the reality of the mathematics instead of telling us "We can't provide that; the money does not exist to give every retired person a triple bypass and two new hips" we instead created ponzi schemes to attempt to extend how much credit was available in the system.
We allowed Alan Greenspan to circumvent bank reserve requirements by permitting "sweeps" - a clearly and obviously fraudulent practice as it's only purpose was to permit the intentional "gearing up" beyond what the law permitted.
We then allowed Alan Greenspan to approve the merger of Solomon and Citi, which was black-letter illegal at the time.
We passed Gramm-Leach-Bliley, eviscerating The Glass-Steagall Act that had kept the commercial banking system safe for over 50 years, and retroactively making the merger of Citi and Solomon lawful.
We bailed out the bondholders of Continental Illinois, telling the market that you can buy the debt of any financial company and you will not lose your money no matter how stupid (or even how criminal) management is.
We allowed the peddling of worthless securities during the 1990s by Wall Street during the Internet bubble -- firms that the offering investment banks and their analysts called "crap", "****" and other very-descriptive (and accurately-so) terms. Despite my and others warnings that the claims of exponential growth of the Internet on a current and forward basis were both false and mathematically impossible virtually no one went to jail.
We allowed banks and others to write intentionally bogus mortgage loans; Citifinancial's former chief risk officer testified under oath before the FCIC that by 2007 80% of their loan production did not meet quality standards. These loans were packaged up and sold despite actual knowledge of this deficiency and it was not disclosed to investors. Citifinancial of course was not the only bank that was doing this -- they all were.
We allowed banks and others (including an unregulated subsidiary of AIG) to write trillions of dollars of credit protection and other derivatives of various sorts without any evidence that they could actually pay. This in turn allowed banks and other institutions to claim that very risky assets were "money good" when in fact they were not. That is where the "systemic risk" came from, and it was an intentional act on the part of our regulators that permitted it.
We allowed the government to lard up the entitlement budget with program after program with no ability to pay for them, and what's worse, most of them had built-in exponential expansions of their own that dramatically exceeded the growth rate of the economy. None were explicitly capped to the expansion (or contraction) of GDP.
Despite the bleating of both left and right neither side of the political aisle has done a damn thing about any of this -- not then, not now.
Now we have come around the bend, the train is traveling at 70mph and accelerating, and the mathematically inevitable solid side of the mountain has come into view, and the tracks lead straight in toward it, head-on!
The World Economic Forum said that we must double systemic credit to sustain a "reasonable" GDP growth rate on a global basis. But we hit the wall in 2007 because people couldn't pay as agreed -- we shifted that payment risk to governments Now they're falling one after another into insolvency themselves, and in response we're trying to bail out the credit drunk by giving him a bottle of whiskey in the belief that he was become sober!
It's not going to work.
There are two -- and only two -- choices.
- Admit the truth. We made political promises, especially in the entitlement area, that we cannot keep. The politicians on both sides of the aisle intentionally lied to buy votes. When the numbers caught up with them they allowed Wall Street to asset-strip the public in a futile attempt to keep the game going. These are facts, not conjecture and we can face them, accept that which we cannot afford to pay won't be paid and take the adjustment in our economy and realign it to work within what's possible. This is the equivalent of slamming on the brakes on the train. We are going to hit the rock; the physics of the matter make it impossible to stop in time. But we can hit it at 25mph if we choose to slam on the brakes now and we can also warn everyone on board to brace for impact, lessening the inevitable carnage.
- Continue to play partisan political games and amplify the lies. Instead of slamming on the brakes -- withdrawing the excess liquidity, managing the bankruptcies, restoring the rule of law, prosecuting the wrongdoers where we can and ejecting them from the realm of finance and politics in all cases -- we can keep lying, pretending, and compounding the damage. Seeing the wall up ahead we can move the throttle from "accelerate" to "FULL POWER!" and go from our present 70mph to more than 100mph at impact.
In short we no longer have any easy choices. Now we are choosing between plenty of pain and possible loss of our nation's political and monetary system -- that is, insufferable pain.
Those are the options folks. I wish they were not, but they are. Those who argue that we "should not" engage the OWS folks and try to educate the people involved in the movement so they bring pressure for positive change are, in my opinion, fools.
The side of the mountain, and the tracks we are on that lead right up to the vertical face of it, are both in direct view at this point. WE the people -- all of us -- blew it. Back in the 1990s we refused to force our politicians to do the right thing, we didn't do it after the tech wreck in 2000, we didn't do it when we were collectively pulling out phantom home equity to buy Hummers and we didn't learn a damn thing from the collapse of 2008. Some of us tried to organize protests and political action but the fact of the matter is that an insufficient number of people were willing to listen and act. That's not only the fault of those who didn't act, it's also the fault of those who failed to persuade -- myself included. We tried and failed but this is not an excuse for giving up and hiding in a hole.
There is no longer a question about the outcome -- only about whether we are going to try to slow down before we hit the granite or whether we wish to see whether or not the impact will be visible from Mars.
Leverage (look to the right) is my attempt to bring all of this, from both a historical context and a present context -- into the public debate. It also sets forth what I believe are policy prescriptions that (unfortunately) cannot prevent the impending impact but will lessen its severity -- if we choose to take them.
As for my part The Market Ticker and Tickerforum are going dark on the 2nd of November in solidarity with the called General Strike out of Oakland. On that day there will be only a "we're on strike" banner displayed on this site.
Each and every individual must choose on their own what path to take. We are all on this train called The US Economy whether we like it or not. The engineer (Congress and our President) is a madman, he has locked himself in the cab and jammed the throttle open. These are facts.
Your options are to squabble among yourself, arguing over whether the left or right is "more to blame", voting for a new engineer (despite the fact that they're all insane and we're likely to hit the wall before the next opportunity to vote anyway), saying "**** it" and waiting for the flash or you can raid the bar car and getting drunk. Your final choice is to attempt to climb over the top of the cars, brave jumping the open gaps between them at 80mph, risk being crushed under the train if you slip, and (if you make it that far) attempting to break into the cab, kill the throttle and apply the brakes.
I'm going for the cab: Win, lose or draw I'm going to try to slow this train down. I'm in solidarity not only with the 99%, and yes folks, it is the 99%, but also with the passengers on UA 93 who made the exact same choice when faced with the same options.
You're free to do as you wish, but don't expect me to respect the drunks, the folks who simply cry or the squabblers if I and those who are with me succeed and as a consequence we all survive.
If, on the other hand, I fail, then so be it. We're not worse off for the effort -- that much I'm sure of.
I'm not going down without a fight.
