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2019-07-19 07:00 by Karl Denninger
in Monetary , 211 references Ignore this thread
Choose: Fix It NOW Or Hundreds Of Millions Will Die*
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Oh my.

My last article, as expected, was indeed a stick in the hornet's nest.

The idea of shooting the bastards isn't popular, you know.  But in point of fact the thought of doing it should be very popular, as should be the implied threat.  After all that we threatened exactly that, then did it when the implied threat was not taken seriously is why this nation exists.

And I remind you: We did it because the British came for the people's ammunition.  Not the guns, the ball and powder.  That was enough; we shot them.

Concord wasn't the first insult; it was simply the last in a long line of them.  The British were warned, repeatedly, and ignored those warnings.  There were little skirmishes here and there, and occasionally someone got shot -- including colonists.  Indeed, the Boston Massacre in 1770 could have conceivably led to an immediate shooting war -- but didn't.  In a particular note of irony John Adams -- yes, that John Adams, future President of the United States -- defended the British at their trial for murdering Crispus Attucks.

But let's look at more-modern times.

Specifically, this ridiculous act of incitement that came out yesterday:

NEW YORK (Reuters) - U.S. stocks moved higher on Thursday after a slow start as comments from New York Fed President John Williams helped cement expectations for an interest rate cut from the U.S. central bank at the end of the month.

Williams actually said that the "neutral" rate was, in his opinion,. 0.5%.

This sort of garbage should result in an immediate firing of said Fed Governor, and if it's not forthcoming the people should rise and demand he leave his seat under whatever penalty is necessary to make that happen.

Why?

Simple: There can never be a rate of interest anywhere on the curve that is less than the federal deficit as a percentage of the economy or you are stealing from the publicOver the last 12 months the deficit has been $781 billion.  GDP as of Q1 2019 according to the BEA was $21,060 billion.  This means the federal deficit was 3.7% of the economy.

Therefore there can be no interest rate in the curve that is less than 3.7%.  In fact it has to be higher -- even if only by a little bit, because time has value and therefore to borrow money, even for a day, must have a cost in real terms.

This understates the reality of credit creation (by quite a lot) but this particular metric is irrefutable.  We can have a lively debate about credit card and student loan debt, for example; the latter is part of the public debt now since the federal government backs it all but the former is not; commercial banks literally create it with zero collateral behind it.

Nonetheless there's no argument on the federal deficit; every bit of it is inflation.

If the rate of interest is below the rate of inflation then you are losing real value.  Period, end of discussion, full stop.

To do this on purpose is to steal the rest of the value from the American people -- each and every year.  Specifically, right now Fed Funds is trading at 2.41%.  Since the deficit is 3.7% the fact is that 1.29% of $21 trillion dollars is stolen from every person in this country on an annual basis at present rates.

This is $271 billion dollars a year or about $821 per person, per year in the United States.

If Williams got his way (and the Fed Funds rate was 0.5%) then it would not be $821 it would be $672 billion or about $2,036 per person, per year.

There is this trope that when it comes to war it's all about energy.

Well, no.  Yes, it is true that borrowing below the Federal Deficit rate means you're paid to borrow.  This means you can frack, drill, etc -- and get paid to borrow the money to do it.  However, if you think the $1/gal gasoline price difference is "free" it most-certainly is not; where do you think the $821 per person goes?  Right into the oil company's pocket, in part.

It is true that war ends up -- most of the time -- being about resources.  But energy is available in nearly all cases in some form or fashion; the Germans, for example, figured out Fischer-Tropsch and thus were able to turn carbon (coal) into synfuel. Indeed, you can do that from CO2 in the atmosphere if you want to; it is therefore about money, that is, the cost-per-unit of energy and when you abuse monetary and fiscal policy you're not only setting up for war you virtually guarantee it.

The problem with this sort of monetary policy is that it is never enough once you start.  Once the market gets "used" to this idea -- that borrowing should be something you're paid to do instead of something you pay to do then people, companies and governments will do much more of it.  The result is buybacks, stock prices skyrocket and similar all over the economy.

But none of this actually helps you; it in fact screws you because that $821 is real, it's extracted every year and it falls on everyone, whether they do anything or not.  You cannot outrun this by buying stocks or anything else for that matter -- not gold, not property, nothing.  The reason is simple -- your entire personal economy is impacted by the inflation but you can only invest your surplus, that is, whatever you make minus what you need to consume.  Therefore you are always behind unless you either can take risk or use leverage that isn't yours if the bet turns out badly, much as the banks did before 2008.

Therefore if you can invest even 50% of what you make you can only "get back" half of the destruction served upon you since the other half has to be consumed for you to live.  The only way to evade that is to play with other people's money and skim off the top of it (which is theft) or con the government into covering the losses when the bets go bad.

If this was always just $821 and never got worse it would be bad, but tolerable.  The sad reality is that it never is, because once you start down this road you are no longer acting to make a profit; they're acting to steal from others.  But that theft is a fixed amount, which means your EPS -- that is, your alleged "profit" -- never goes up.

What's a company worth that can't increase it's profit?  Nearly nothing, ultimately -- it is incapable of getting any bigger, better, or making more money.  It therefore has no stock price that matters.

Therefore this path once it begins requires the government always increase its deficits as a percentage of GDP and The Fed, or whichever Central Bank is involved in whatever nation, always must increase the "spread" between said deficit and rates in the negative direction.

In other words the theft must always get larger, every year, or the scheme collapses and so does the market.

But trees do not grow to the sky and ever-increasing exponential scams cannot be continually maintained.  This is mathematics, not politics.  These schemes will always eventually collapse under their own weight and when they do huge numbers of people are ruined.  If it goes on long enough not just individual people but entire nations are ruined.

That's the problem and why such an event as policy must never be permitted.  It is why the people must rise and tell the government this must stop, now, and if it doesn't we will do whatever we have to in order to make it stop, up to and including reprising 1776.

Contemplate this folks: There has never been a nation that has entertained a below deficit interest rate policy in other than emergency circumstances such as an actual shooting war and managed to exit that policy successfully.  In most cases the result has been either civil and monetary collapse or war. People cite the US post-WWII; the Fed during that time did repress interest rates but we had just blown up everyone else's capability to produce things all over the world!  The instances in which disaster did not happen were all a consequence of similar circumstances.

Japan is the notable exception to that thus far but despite their repeated claims that they could exit said policy over the last two decades they have failed to do so and there is exactly zero evidence they ever will be able to do so.  At the same time their economy has been decimated; they were once the pre-eminent source of high-tech goods.  Not any more.  Their much-vaunted car manufacturing has been moved in no small part to the US and other nations.  Yes, the firms are centered in Japan but most of the cars are not built there anymore nor do they employ Japanese labor.  Why?  Because the theft there consumed all of the saved capital of the nation and that is always the source of innovation and, ultimately, business formation.

Let's take Germany.  After WWI the Treaty of Versailles not only demanded reparations it also demanded the confiscation of guns from the civilian population.  The German Government did so.  They then tried to run fiscal deficits in order to maintain the appearance of everything being ok.  Exponents are a BITCH, however, and the problem quickly spiraled out of control.  The people did not shoot the government, which they should have done immediately.

Why?

Because not doing so ultimately led to the collapse of the Deutsche Mark, the collapse of the Weimar Republic and the rise of Adolf Hitler along with the death of somewhere between 70-85 million people in WWII.

Had the people of Germany risen and shot the government, as we did in 1776, some of them would have died.  Maybe quite a few of them.  But there would have been 100 times less death than what happened instead.

For sitting on their hands and burning Marks -- literally burning currency for heat -- the people of Germany tolerated the fiscal and monetary authorities undertaking an action that was mathematically certain to ruin them and the only way out that the government ultimately saw from this policy was war.

America is not blameless in this.  In fact we're one of the worst offenders in this sordid episode.  By what right did we try to impose the disarmament of the civilian population in Germany?  Do we not have a Second Amendment?  Is the Second Amendment not there for the explicit purpose of an ultimate check and balance against a government and monetary authority that undertakes a policy which is mathematically certain to ruin the nation?

It sure as hell is; in fact that's the entire point of the Second Amendment!  Should the government undertake a set of policies that the people determine are destined to ruin the nation the people have the right and the ability to put a stop to it by whatever means are necessary, including, if it comes to it, shooting the tyrants.  We denied the German people that unalienable human right, we arrogated to ourselves the ability to deny that right to them and the result was EIGHTY FIVE MILLION DEAD PEOPLE including six million Jews.

WE DID THAT.  WE TOOK THE TOOLS OUT OF THE GERMAN CITIZEN'S HANDS TO STOP IT.

Not some magical fairy, America.

Yeah, that was stupid and we paid for it with a half-million of our citizen's lives in the ensuing war.

By the way, the Soviets paid for our arrogance with some twenty four million of their citizens.  You think Putin ought to be impressed with us when we screwed his nation with a casualty rate fifty times ours?

Now granted, basically all of the people who did that are dead.  Fine.  No reparations for you sir!

But if we don't learn from that grievous mistake we're going to repeat it.  We are in fact doing it right now.  Japan has a debt-to-GDP ratio of about 250%.  China has a 300% debt-to-GDP ratio.  We're running fiscal policy and pressuring The Fed to run rates below our fiscal deficit instead of the opposite.  We should put into place a demand for the opposite and that law ought to be enforceable, by hanging if necessary as it was formerly in America under The Coinage Act of 1792 which proscribed a penalty of death for the debasement of the nation's money, an act that is taking place right now and both The Fed and Congress are equally guilty.  We The People in fact must demand restoration of that clause and penalty and then enforce it -- today.

I remind you that within the next six years at present rates we will hit one of the many walls via this policy, and it's a big one.  Specifically, Medicare will go broke and be forced to either not pay or to steal the required additional funds.  This is not small-ball; Medicare and Medicaid in fact consume over a trillion dollars a year at the present time.

Trump, our President, is in fact cheering this on.  "The Squad" wants even more deficit spending than does Trump, as do the rest of the crazies on the left.

This path leads to social collapse or war.

It is cheaper to stop it now by demand, backed up with the willingness to do whatever it takes, even if that demand has to be enforced the hard way, by a factor of hundreds, than to let this garbage continue.  Many of the nations that are engaged with us in this path have nuclear weapons.  We will not kill people one at a time, or 100 at a time.  One bomb or missile will kill a million at a time.  85 million dead from WWII will be a tenth or less of the body count if it comes to that -- and it will if we do not stop walking the path we're on.

I repeat: THERE IS A 100% RECORD ON THE OUTCOME OF THE CURRENT PATH OF ACTION BY OUR GOVERNMENT AND THE FEDERAL RESERVE AMONG NATIONS OF THE WORLD.  THERE IS ABSOLUTELY NO REASON TO BELIEVE WE WILL OBTAIN ANY DIFFERENT RESULT THAN HAS OCCURRED EVERY SINGLE TIME A GOVERNMENT AND CENTRAL BANK HAS TRIED THIS.  IT HAS NEVER WORKED.  IT HAS ALWAYS LED TO STAGNATION AT BEST AND WITH ONE EXCEPTION THUS FAR, JAPAN, IT TYPICALLY LEADS TO ECONOMIC COLLAPSE OR WORSE, WAR.

WAR, TODAY, AMONG NUCLEAR NATIONS, MEANS THE DEATH OF TENS OR HUNDREDS OF MILLIONS OF PEOPLE.

You choose America -- but choose wisely and soon, because as I pointed out in my Lily Pad essay, by the time you see the pond 50% covered -- and you think you've still got plenty of time you are literally one day away from being dead -- every single one of you.

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