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2019-07-27 07:00 by Karl Denninger
in Macro Factors , 423 references Ignore this thread
Get Your Mouth Off His Schwantz*
[Comments enabled]

This garbage is just flat-out ridiculous:

I earn my living investing other people’s money in the stock market. I am terrified contemplating how I am going to save my clients’ money, as well as my own, if a Democrat is elected president. The policies that the Democrats are advocating will destroy the American economy, not just the stock market, but the whole US economy. My first instinct will be to raise cash ahead of the stock market crash, but even that is only a temporary safe harbor.

The Green New Deal, renewed regulations, Medicare for All, free college,  as well as the 70-90% tax rates proposed by Democrats, will tank the stock market and US economic growth, leading to higher unemployment and reduced wage gains. All these programs require higher taxes and not just the soak the rich fantasy of the 70-90% rates. Most of the Democratic candidates have pledged to roll back the 2017 Republican tax cuts that fueled the renewal of economic growth in the US.

All of this is true.

But it's irrelevant.

As I've pointed out for more than a decade by 2024 CMS -- that's Medicare and Medicaid -- are incapable of the shenanigans that they use to suppress their budgetary deficit impact.  This is not rocket science, it's arithmetic, exactly as is the so-called "doom dates" on Social Security.

But Social Security's "doom dates" are in fact rather minor.  Being able to pay 80% of a promised benefit (that is, you're running a ~20% fiscal deficit which is consuming assets) is sort of ugly, but that's fixable.  Nobody's going to like a 20% tax increase on FICA (7.65% of wages up to the cap, plus another half you don't see) but raising the cap, increasing that tax by 20% or some combination that gets to the same place resolves the problem.

That's not catastrophic.  Nor, for most people, is a 20% reduction in payments, although the howling (and election losses) that result from the latter guarantees that won't be the outcome.  Those tax changes will and can be made and will not result in a collapse of the economy.

However, CMS is not running a 20% fiscal deficit; in their case roughly one dollar in five is covered, not four dollars in five!  When they run out of that stoked-back powder there are two choices, and only two choices:

1. Essentially default in its entirety on the promises made to Medicare recipients, both current and forward, forever.  This will simply cost-shift basically all of that onto Medicaid, particularly with regard to nursing home care once you bankrupt the vast majority of Medicare (retired) people, which will happen almost instantly.


2. Congress changes the law so as to permit CMS to run without backing, that is, the entirety of their operating deficit shows up on the federal budget as a fiscal deficit.

Social Security and Medicare are currently prohibited by law from doing #2.  Congress will have no choice but to permit #2 for at least Medicare, and since utterly nobody in the political or news space de-aggregates these two programs when talking about "fiscal cliffs" even though they have radically different exposures and funding problems the pressure to do it for both in the same bill will be overwhelming.

Not that it really matters; #2 will roughly double the federal deficit on an essentially immediate and permanent forward basis.

The "big lie" is this:

Whatever you think of President Trump, you know by his record that he will put America first and that his policies have created a robust economy. Unless you want to see the US economy and your standard of life destroyed, there is no alternative to voting for President Trump.

No, he has not.

The GDP data is here.

It shows a 4% gross GDP advance over the last 12 months (to Q2/2019.)

Debt to the penny shows a 3.91% fiscal deficit as percentage of GDP over the same period of time.

In other words there is no "robust economy" at all; it's a lie.

Actual GDP expansion in real terms over the last 12 months is 0.09%!

Statistically-speaking that's zero.

These are not my numbers and not my assertions; they're the government's figures and they're widely-regarded as facts.  Trump's most-recent "budget deal", which he is advocating for, has passed the House and will almost-certainly pass the Senate and be signed into law will remove all fiscal rectitude until the middle of 2021 by suspending the debt ceiling entirely.

Again, I remind you, by 2024 on current trajectories that roughly trillion dollar deficit ($828 billion on a rolling 12 month basis at present, and accelerating) will permanently double.

Yes, GDP will go up, since every dollar of that deficit will be immediately spent.  That's how borrowing works; you borrow money and you spend it, and as soon as you spend it GDP increases.  That's basic math and economics.

However, diluting the currency as a means of "goosing" GDP doesn't actually advance anything in terms of actual economic output.  Worse, productivity, if you believe the BLS, is "advancing" at 3.4% annually as of the last read.  This is, paradoxically, very negative in light of the fiscal deficit because "doing more with less", which is the definition of productivity, means that GDP should be running at least at that level on a fiscally-adjusted basis!

In other words if you include productivity, and for honest numbers you have to, the US is currently in a deep recession as it is in fact contracting real output on a roughly 3.3% annual rate.

How is this possible given "full employment" and the stock market soaring?

It's not hard to figure out; it's happening the same way you're "just fine" if you make $100,000 a year but continually add another $4,000 a year to your credit card balances.  That $4,000 is quite a lift in your standard of living.  It allows your family of four "another" week-long cruise per year, for example, or a very nice trip to Disney, or, for that matter, more than half of the monthly payments on a brand new $50,000 "loaded" pickup truck or Lexus.  Note that if every family did this GDP would increase at that same 4% since you're all spending 4% more than you make and the gross output will thus lift by that same 4%.  The (obvious, to anyone with more than two firing neurons in their brain) problem is that you're not really gaining any prosperity at all; in fact you're going backwards as you're accumulating an obligation that at least has an interest expense and at least in theory eventually must be paid off!

This illusion of "prosperity" can continue for a very long time -- so long as your credit card company doesn't call the loan, or even just shut off the spigot and deny any more charges. But even if just the latter happens not only does that $4,000 a year of "spending" disappear the interest payments do not disappear, and since you can't afford to pay down any of the principle those interest costs go on forevermore into the future.

Again -- as things stand right now we're consuming our capital base at a roughly 3% annual rate.  That depletion rate is set to double within the next five years.

I do not know when the markets will wrap their arms around this just like I don't know when you as a family would if you were running up your credit card on those Disney vacations.  But I do know that the day when it happens will come.  Not might, not could, will.

The willful and intentional denial of this fact by you, Greenwald, along with the others drum-beating for the flying-hair monster currently in office will simply make it worse when it does happen.  After all a market crash from DOW 27,000 to DOW 5,000 is very, very bad.  But one from DOW 35,000 to 5,000 is demonstrably worse because more and more people will believe that the so-called "value" in those assets is not only real but theirs to consume over the coming years when in fact it is not.  How many of those people have a half-million dollar "retirement fund" that is, in fact, really a $50,000 one?

What really galls me, however, is so-called "money managers" like the cited one in this quoted article, who believe that (1) this "prosperity" is real despite the data saying its not being literally in their face, (2) Trump is responsible for it and (3) voting for Democrats will be a disaster while not doing so will continue the "prosperity."

The root problem is that there is no prosperity in the first place; it's a chimera and fraud writ large and has been the case and policy of both parties since approximately 2000, when the accumulation of federal debt crossed the zero boundary and began resulting in negative contribution to GDP.

This is an exponential series.  Like all exponential series the negative impact starts slowly and thus the "belly" in the curve from the two lines on the chart for a while expands.  Yes, the top-line (debt) is accelerating but the imposed cost starts at a lower level and thus there's more "gap" between the two curves for a while.

But arithmetic tells us that exponents always behave exactly the same way.  That the appearing-safe "belly" will disappear, the gap will close and when it does you have a catastrophe because you can't cover the expense.  There is nothing you can do about it other than to halt the excessive spending and pay down the outstanding balance, but this requires not just halting the excessive spending (that is, cutting it to income levels) but going even further in order to pay off some of the outstanding balance.

At present the Federal Government is spending approximately 25% more than it takes in from all taxes combined.  To halt the detonation the spending cuts must therefore be more than 25% in total, now and forevermore into the future.  Everyone in DC has a wipe-out, toddler-style screamfest if you propose not spending more every single year yet the corrective action required is for one quarter of all money spent today be whacked off the budget.  That's how far down the rabbit hole we've gone, all without a single whimper of revolt or refusal to consent by the public at-large.

The mantra for the last 30+ years is that we're "leaving this mess to our kids and grand-kids", implying that we're saddling those who either cannot yet vote or worse, aren't yet born.  That was true 30 years ago,  It was probably true 20 years ago, as the generation just being born then would become adults about...... now.

But today it's no longer true.  We're not leaving anything to anyone.  The problem is here, it's ours, and we either stop it now or it will blow up in our faces.  Five years is a very short period of time to make fiscal adjustments and allow the economy to adjust and come back into balance.  Trying to eke out another 10, 20, or even 50% in stock prices over the next five years is not only unwise it's literally suicidal on a national basis and those advocating for same deserve to be held to account when, not if, their continued drum-beating for a fiscally, economically, politically, morally and ethically bankrupt position results in mortality.  One can only hope it's their progeny, spouses and then theirs personally, in that order first.  Sadly while I can hope and pray for them to be first it will not be only them no matter who goes first; the count of ordinary people who will be utterly destroyed and likely die is going to reach all the way from top to bottom with those at the bottom bearing the greatest percentage of losses.

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