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2019-01-21 07:00 by Karl Denninger
in Monetary , 311 references
[Comments enabled]  

Oh boy....

(CNN) So much ink has been spilled for so long on the national debt, it might be nice if that $22 trillion plus on the red side of the US balance sheet just didn't really matter.

That's exactly the thinking behind a new school of economic theory that the government should be spending more, not less.

It would be nice if it worked that way.  There's a so-called "modern" view of economics that indeed it doesn't.

I love how the purveyors all call something "modern" (implying you're a stone-age monster) if you disagree.  This is all part of the cult of legitimacy, of course, where most of an argument is reduced to feelings instead of facts.

The proponents of this garbage claim there's been no inflation so why does anyone care?  They do recognize that inflation is what will happen if you overuse this capacity, but -- they claim -- it hasn't happened yet so we can keep going.

This is akin to saying that 2 + 2 = 1.

How do you measure inflation?  Well, the common claim from these clowns is that you use the government's numbers -- specifically, CPI.  It says there's no inflation so there isn't, so it is claimed.


Let me point out a few inconvenient facts.

First, CPI only measures some things.  The name is consumer price index.  In other words, it is only intended to measure the price of things you consume.  That explicitly excludes assets.  But you require assets to live, and the price of them is inevitably paid for by you.

Then there's this nonsense, directly from the CPI itself:

In calculating the index, price changes for the various items in each location are aggregated using weights, which represent their importance in the spending of the appropriate population group.

Or so the Bureau of Lies and Scams claims.

The reference of "100" is set at 1982-84; in other words, a "200" means that item is allegedly twice as expensive as it was in 1982.

The "all items" index number, unadjusted, is 251 at the present time. If there has been no inflation why is the average price 251% of what it was in 1982?

Then there are the crazy outliers -- medical care services are 522% of the 1982 price, for example.

Shelter is over 300% the price.

Car insurance is 572% as expensive.

Do you smoke?  That's 1,082% as expensive.

But there's been no inflation.

Uh huh.

Last month's "tame" number was driven by a large drop in the price of gasoline.  This has happened due to an interesting change in the oil market in the United States, and a lack of pipeline capacity to move gasoline.  Oil is not a single substance; it contains a large variety of hydrocarbon chains.  Refining oil is about "cracking" the input oil into its components; very light distillates such as naptha, somewhat heavier (gasoline) and on (kerosene/Jet, diesel fuel, lubricating oil and onward to bunker fuel.)

"Fracked" oil has a different composition than conventionally-drilled oil.  The result is a shift in the refinery output; while a refinery can change that split (called "the crack") to some degree it's expensive as hell to do so as it requires high-temperature catalytic processes.  The result of this has been a gasoline glut and diesel shortage.

Traditionally diesel fuel was close to regular gasoline in price in the winter and cheaper in the summer, because diesel fuel is the same thing as home heating oil.  No heating oil demand in the summer meant there was excess diesel in the crack, therefore the price came down in the summertime.

But the fracked oil produces a different crack split; we now have a shortage, all things being equal, of diesel all the time.  Thus the price of diesel is $3/gal and the price of regular gas is $2.  This is great if you buy gas (thus the drop in the CPI) but there hasn't been a material price change on an annual basis in heating oil (diesel); that price is actually up.

Then there are other outrages.  Health insurance is claimed to be 1.08% of your budget.  Uh huh.  The price is claimed to have been up 5.4% in the last year.  This is an improvement, I suppose, in that health insurance a few years ago was claimed to be 0.6% of your household budget!  For comparison car insurance is claimed to be 250% more expensive as a percentage of household operating budgets than health insurance.  If you believe this I have a bridge for sale over the Hudson River.

The CPI also ignores such things as property taxes.  It claims to include all direct taxes in the price of a product or service, but property tax isn't a direct tax.  It also ignores house price inflation, instead using what is called "Owner's Equivalent Rent", which is claimed to be what you would have to pay to rent your owned house.  How do they come up with this?  Good question -- and without much if anything in the way of a decently-documented answer.  May I point out that when people charge a lower rent because they believe prices will rise and thus they'll make a capital gain that would lead to a LOWER "Owner's Equivalent Rent" and yet the expectation and market price of houses is rising in a bubble!  That is exactly, and intentionally, backward and produces an intentional false inflation reading.

The facts are that property taxes have skyrocketed.  That's inflation.  The property tax on the house I used to own in the Chicagoland area has more than doubled since I sold it, and now is over $20,000 a year.  That's insane.  The property tax on the home of my late mother's residence has gone up enough that in nominal terms the house is worth no more today, before wear, than it was in 1995.

Due to inflation the actual value of that home in constant dollars (that is, constant spending power) has been cut by half or more!


Like Hell.

Everyone running that lie needs to be BBQ'd and eaten.  I pledge one case of BBQ sauce and one bag of lump charcoal to the cause.

Mathematically inflation is simple to determine: The amount of unbacked credit (debt) put into the economic system of the United States in a year, as a percentage of the economy, is the inflation rate.  PERIOD.

We can argue over what is unbacked and what is not in the consumer sector.  For example your credit card is clearly unbacked as there is no asset pledged specifically against what you charge and if you charge a meal what's there when you're done with it is literally crap.  Similarly, student loans are 100% unbacked.  But a car loan is arguably not; you do not actually own the car until you pay it off, and your equity rises as you do.  In other words a loan against a hard asset that already exists is a time shift and not (long-term) inflationary.

All government deficit spending is unbacked -- always.

Last fiscal year this was approximately 6.2% of the economy.  That's the inflation rate.  It went somewhere; that it doesn't show up in this place or that in the CPI doesn't mean it doesn't exist -- it just means they didn't measure it, in some cases on purpose, such as when it comes to "health insurance" and "property taxes."

Second, productivity improvement means that without monetary shenanigans you should have a mild deflation, that is, your purchasing power should go up rather than down.  If I can make 110% of what I used to be able to make due to superior technology and application of my effort then the price-per-unit should fall by the difference.  That is the very definition of productivity.  The benefit of that should flow through to everyone in the form of lower prices with a constant dollar supply.

Productivity growth tends to be around 2%, so on an average annual basis you should see about a 2% decline in the average price level across all things in the economy.

This never happens because of the *******s who steal your wealth via inflation and they now seek to lie to you about it through some alleged "modern" theory that they claim says debt doesn't matter.


A few years ago I debated one of these assclowns on Lauren Lyster's show back when she was allowed to actually let guests speak, on RT believe it or not.  He was going on and on claiming the government could simply add more and more money to the system and it would all be ok.

When it came to be my turn I held up a bill on camera and ripped it in half, then proclaimed that by law if I said half a $20 was just as good as a whole one I now instantly had twice as much money!  Of course I still have the same number of cars or ears of corn in the world as I had 5 minutes beforehand so what do you think will instantly happen to the price of a car or ear of corn?

My "opponent" got to do the baby-blubber thing in response.

The sort of argument being made by CNN is an open and notorious fraud.

We used to throw people in prison for fraud.

Now we cheer them on even when it's we, the people who are being defrauded.

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2018-10-07 07:00 by Karl Denninger
in Monetary , 467 references
[Comments enabled]  

Oh Bill Still!  Oh former Libertarian candidate for President who proclaimed this on stage:

"Crashes are caused by just one thing, and that's bubbles.  Bubbles are caused by just one thing and that's banks being in complete and total control of the quantity of the american monetary system in complete and total contradiction of the American Constitution."

But now, Mr. Still has found his #MAGA hat and his wife is worse, shilling his videos all over the Internet supporting outright monetary fraud and, in addition, shilling for herself with MLM "dietary supplements"!

Principles?  What are those?  Gee, did you forget what you actually said Mr. Still?

Well, let me remind you what the facts are from the US Treasury's own web site:

DatePublic DebtSoc. Sec./MedicareTotal



Now the GDP of the nation stands, as of last read, at $20,411,900,000,000.

Four quarters ago it stood at $19,588,100,000,000, a difference over the last year of $823,800,000,000.

In other words GDP is actually negative because the expansion of federal debt is greater than the expansion in GDP in dollars.

This is a matter of arithmetic -- not politics.

The problem is that in real terms you need to earn at least 6.23% to break even on a government (or any other) bond.  At any rate of return under 6.23% you are losing money in real terms if you buy such a security.  Of course right now Treasuries are all earning less than this (a lot less!) yet the above is a mathematical fact.

That is, in actual monetary terms the real inflation rate is 6.23%, not 2%.  The Fed can lie and the BLS and BEA can lie with their CPI tables but arithmetic does not lie and each dollar of monetary expansion by the federal government is a dollar of inflation -- period.

This sort of misdirection can be gotten away with for a while.  It was in the 2000s, and in the 1990s.  But it cannot be gotten away with forever because the damage in purchasing power done to everyone by this behavior is both real and immediate and it is this very behavior by governments and private banks that cause both bubbles and the resulting crashes.

Trump knows this and does not care.  He believes he will be out of office before it all blows up in his face.  Bush believed that too, and he was wrong.  Obama ran the same crap after the 2008 crash and got away with it for the eight years he was in office.

Trump will not get away with it.  We are running a 6.23% fiscal deficit during an expansion in the economy.  That's outrageously large and in fact belies the truth -- there is no expansion at all; the economy is in fact contracting and yet the false signals being sent to employers and others leads them to do uneconomic things like borrow money to buy back stock.

It is this very uneconomic behavior that in fact leads to crashes because it causes the valuation of assets to be falsely priced far above their actual value due to the perception that this insanity can and will go on forever, and thus whenever you wish to sell you will be able to at a higher price.

When reality comes calling prices do not "correct" they crash because there is utterly no underpinning for the valuation metric that you have been using and due to the effects of compounding actual valuations are half or less of where prices are trending!

It is stupid to continue to prance around and call this sort of economic distortion "good", but that's what I expect from our lying, fake-news media and serial liars and bubble blowers such as Larry Kudlow.

But the true test of whether someone is actually nothing more than 2-bit ***** or believes what they say comes when someone who has made public speeches on the insanity of such behavior and in fact ran a campaign for the highest office in America on this very basis turns on a dime and supports the people doing it now.

**** you Mr. President and Congress both -- you're setting up the worst collapse and crash since the 1930s.  Double-**** you, however, to those who have claimed in the past to be supporters of monetary and fiscal truth but have discarded same due to a putrid and fraudulent infestation in Washington DC that happens to be buttering one's bread via Youslob horsecrap and MLM schemes.

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There are few more self-destructive things a human can undertake than denying provable facts.

Only a few things qualify as "provable facts", and it is important to separate out hypothesistheory and opinion from fact.  Mathematics and physics are two areas of discipline that have massive amounts of their subject matter within the realm of provable facts.

Honest people call the parts of these disciplines that are within the ability to prove laws. Unlike laws made by men that are often ignored these are simply inviolate -- period.  The laws of thermodynamics prohibit a "free lunch", basically; they state that while energy may be transformed from one type to another, and other parts of physics make clear that matter and energy can also be transformed you never get out everything you put in; there is always loss to the environment that you can neither use or avoid.  Newton's laws of motion tell us how momentum, mass, force and velocity interact; how energy, in short, is carried and dissipated in an object that moves or is contacted by one that is moving.

Likewise the laws of mathematics tell us that 2 + 2 = 4, that 2(x + 3) = 2x + 6, that the square root of 9 is 3 and more. These are called laws because every single time the same result will be obtained -- here, there, on Mars or somewhere in Interstellar space.

Here's the reality of money:

Money is only valuable because it is, in relative terms, scarce.  Money is really nothing more than a unit of accounting that's convenient in the physical world.

We could (and perhaps should) account for production in the physical world, and its value, in some invariant physical unit.  I happen to like BTUs (or Joules) of energy required to produce a thing or contained within a thing, because it is an invariant and therefore not subject to tampering.  Accounting for it under production rather than the recoverable (e.g. "stored") energy in a good or service means that improvements in productivity (e.g. discovery of a new, "cheaper" way to make gasoline, for example) makes the value of each unit (a gallon, for example) less and accessibility greater.  This is what productivity improvement is supposed to do -- it advances the common benefit to everyone because it makes useful goods and services more accessible to everyone.

So let us assume that among everything in the economy there is 100,000 Joules of energy represented in a given period of time.  Yes, I know this is a ridiculously small number, but adding more zeros doesn't change anything other than scale, and 100,000 is a nice convenient number.

We will also assume that there is $100,000 -- that is, one hundred thousand dollars, in said economy.

It would be reasonable to assume that the average cost of transacting for one Joule of represented production of a good or service would be one dollar.  There would be items in the economy that are of relatively more value in terms of dollars-per-Joule, and some with less, but on average that would be the expected clearing price.

Now let's remember that money is fungible (that is, exchangeable) with credit (which is just another word for "debt"); that is, a promise to make something tomorrow.  They both are accepted in the economy as exactly the same thing, even though they demonstrably are not.

Now here's the problem: Bill and some others (e.g. the MMT charlatans) assert that the government can simply create money.

But that's not true.  The "creation" he refers to is in fact credit because the government did not first produce anything.

Consider what happens if you double the amount of "money" in the system from $100,000 to $200,000, given that 100,000 Joules of production takes place.

The average clearing price of a good or service produced with those Joules will double from $1 to $2. It cannot be otherwise because equations always balance; this is what the laws of mathematics tell us.

Now does it matter whether you borrow or "create" in this regard?  Only in one respect: The prospect of having to repay (potentially with interest) is a check and balance on borrowing that is utterly absent if you "create."

But in terms of the economic impact today, at the point in which you put the new "money" into the system the two acts are exactly identical. 

Both do immediate violence to the purchasing power of every unit of currency or credit that exists in the system at that instant in time.

It cannot be otherwise because the laws of mathematics, which state that equations always balance, are not suggestions!

As a consequence there is no possible way for the government to spend more than it takes in via taxes without distorting the economy and destroying the purchasing power of the people.

"Creating" is exactly the same thing as shaving coins -- it is counterfeiting and is economically indistinguishable at the moment of the act from borrowing by emitting unbacked credit.

Borrowing, in point of fact, other than the interest, actually has a benefit in that when the amount borrowed unbacked is repaid it is destroyed and thus the inflationary impact is reversed.  Of course in today's world we don't repay government debt ever and so that reversal never takes place, but that someone cheats doesn't mean that the underlying premise is wrong -- it just means you cheated.

Further, when rates are near zero there is no difference economically between "creating" and "borrowing"; it is only when rates rise that the difference shows up.  For this reason if "creating" would work we'd already have proof since we've "created" more than $8 trillion by the Federal Government alone since 2008 and yet there has been no strong, positive economic recovery impact.

The mathematical facts are that the only way to stop the destruction of purchasing power and thus economic damage is for the government at all levels to stop spending more than it takes in -- period.

Denying the laws of mathematics makes you either a fool or a charlatan.

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2015-07-07 07:00 by Karl Denninger
in Monetary , 1518 references

I have often commented about innumeracy among the American people, but nowhere do I find it more-distressing than among those who are of sound mind and reasonable (or better) education.

There really isn't any point in having any sort of debate on government reform, monetary reform or anything of the sort with those who deny arithmetic.  It is a complete waste of time to discuss that which cannot work and if your answers do not comport with arithmetic they cannot work.

When it comes to government spending it's quite simple: Government cannot spend, in nominal dollars, more than it taxes.  It does not matter one bit whether the money that government is using is theirs (that is, they're a "currency issuer") or whether the money is issued as debt or by pure fiat -- that is, debt-free.

The reason is as I've put forward for years now -- pretty much since I started writing this column, and which I spent a lot of ink on in LeverageTwo compound (exponential) functions will always diverge from one another.  If the smaller, that is the component of the larger, is growing faster than the whole it will eventually consume the entirety.

There are no exceptions to this, ever, because this is a fact of arithmetic just as 2 + 2 = 4.

Since a sub-part (e.g. government) can never exceed the whole (the entire GDP of the nation) yet the progression of growth of government spending that exceeds that of output (both in nominal terms) must inevitably do so there is no way such a path can succeed.


Every single person who claims to have a high-school diploma knows this because you all learned it in school.

Our Congress refuses to face this -- both parties, not just one.  I have been told that deficit spending will not be stopped -- by Republican leaders, back in 2011 during the "debt ceiling" talks.

Since July 1st of 2011 to March 31st of this year total federal debt has increased by 26.6%.

Since July 1st of 2011 to March 31st of this year GDP has increased by 14.4%.

Federal Debt is increasing at a rate approximately twice that of economic output and this is beginning two years after the end of the "Great Recession"!

It is mathematically impossible to continue doing this; continuation of this policy will fiscally destroy the nation with mathematical certainty.

Yet despite this fact, and that you cannot argue with arithmetic, neither political party will stop it.

It does not matter whether you issue the currency as "debt" or not.  If you "print" the money then the destruction in real purchasing power happens just as it does if you issue as debt-backed currency.  This impairs economic growth in exactly the same way.

There is, in fact, a greater push-back in the form of compounding interest in that said interest also consumes more and more of your funds if you issue debt-backed currency.  It can be argued that this is a positive in that it (should) act as an inhibitor of bad government behavior, even though we have seen that it is entirely ineffective in the present tense.

However, if the government does not deficit spend, that is, if it does not take on debt then there is no impact on government sustainability irrespective of the monetary form.

There are plenty of reasons to like debt-free currency.  Philosophically if someone is going to get to the benefit of currency issuance it should be we the people through the government, not private banks.

But -- and this is key -- that debate is utterly immaterial until and unless deficit spending ceases and advancing it as an "answer" to debt-laden nations who are and continue to deficit spend is utter nonsense.  

Such debate on monetary form is irrelevant here, it is irrelevant in Greece, it is irrelevant everywhere that deficit spending (whether formally or simply through the expansion of debt) is taking place because if you do not stop advancing government spending in excess of economic output expansion your nation and its economic system are mathematically certain to fail.

America has one advantage over Greece and most of the rest of the EU: We have a piece of our federal, state and local government budgets we can whack off without destroying our economy.  We need only enforce existing laws. The answer is found in putting an end to medically-related monopolies and restraint of trade and were we to do it we'd be able to remove roughly $800 billion a year from federal spending alone.

The problem is that we have to take that step and stop the deficit spending now -- while we still can.

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