THE BARRICADE

Denninger:

How can you have a healthy economy with this kind of debt level? You can have a succession of bubbles, ponzi schemes, but not anything financially sound or sustainable.

This shows total non-government debt going from 150% of GDP (approximately) in 1981 to 350% of GDP (approximately) last year.

In 1981 GDP was $3.128 trillion, so the total amount of debt in the system (non-government again) was approximately $4.5 trillion.

In the last year GDP was $14.264 trillion, so total debt in the system was approximately $50 trillion.

This is an increase in the outstanding (not taken and paid-off) debt of roughly $45 trillion dollars.

In the same period of time the aggregate gross output (GDP added over all years) was approximately $218 trillion dollars.  That is, if you sum the GDP of all years in the dollars of the day (not constant dollars) from 1981 to the present, you get about $218 trillion.

The growth in debt outstanding is therefore responsible for pulling forward demand - that is, increasing GDP - by about 21%.

That is on average in each year since 1981 the addition to the current debt incurred by private parties (again, not including the government!) has resulted in GDP being 20% higher than it would have otherwise been over the entire 30 year period.

The parabolic nature of the above graph however makes clear that at the start of the period the “pulled forward” amount of demand was smaller than 20%, and as such it is clear that the “contribution” now is greater than 20%.

But since we live in the here and now, and it is only fair to bias our discussion in the direction of not facing the apocalypse, we will use the 20% figure.

This recession began due to the impossibility of consumers and businesses paying their debt down.  Remember - the recession did not start with job losses and a business slowdown - it began with people defaulting on mortgages and credit cards, and businesses defaulting on lines of credit. That in turn led to a business slowdown which then fed back and caused even more defaults.

Bernanke and everyone else knows this.

They know that we cannot “stuff” the debt channel any more, because we are up against the wall where people cannot pay.

This means that GDP must contract until equilibrium is restored, which is likely to be significantly more than 20%, because (1) we’ve intentionally understated the recent-year impact of this “pulled-forward” demand and (2) as the economy contracts and people are laid off this results in a spiral of less spending, which then feeds back to even more business contraction.

The total de-leveraging of debt by the consumer so far, since January 09 (which was the top in consumer credit outstanding) has totaled three percent - or about 10-15% of the total amount that is required to restore balance just in the consumer lending space.

You have not and will not see this reported in the mainstream media or discussed by Ben Bernanke, but it is in fact the crux of the problem - the only way “out of the box” is to try to ramp lending somewhere so as to create yet more debt to maintain final aggregate demand.  The amount of debt required to do so has gone parabolic and cannot be paid down privately; ergo, the attempt to shift it all to the government via the alphabet soup programs.

This is doomed to fail despite any transient appearances of success as the amount of debt required to maintain the pulled-forward demand is now growing exponentially.

Yet there are only two choices: Face this reality, default the debt and accept a 20% or larger GDP contraction, or keep trying to stuff the federal government (since the private sector has hit the wall and cannot absorb any more credit) and when THAT blows up we lose our government and political system.

The math is irrefutable and Bernanke is fully aware of it, as are the wonks in Wahington DC.

They simply don’t care about the truth and neither does the mainstream media.

If you’re wondering why I go after the media and government so aggressively, this is the reason: The facts are right in front of their face and require nothing more complicated than a 4-function calculator to add it all up.

You are being intentionally misled by all of them.

Zero Hedge, in collaboration with David Rosenberg, Chief Economist & Strategist, Gluskin Sheff + Associates, Inc., is pleased to release the attached analysis “The End Of The End Of The Recession”

A lucid exegisis and a most welcome tonic, too…

A Ponzi scheme, and inside job, and the biggest theft-and-cover-up ever explained by Ratigan and our favorite whore-monger (who, seriously should be SEC chair)

From Robert Reich’s Blog:

What’s pushing the stock market upward? Mainly, unexpectedly positive second-quarter corporate profits. But those profits aren’t being powered by consumers who have suddenly found themselves with a lot more money in their pockets. The profits are coming from dramatic cost-cutting — including, most notably, payroll cuts. If a firm cuts its costs enough, it can show a profit even if its sales are still in the basement.

The problem here is twofold. First, such profits can’t be maintained. There’s a limit to how much can be cut without a business eventually disappearing — becoming, in effect, a balance sheet in space. Secondly, when businesses slash payrolls to show profits, consumers end up with even less money in their pockets to buy the things businesses produce. Even if they hold on to their jobs, they’re likely to fear that they won’t have the jobs for long, which causes them to retreat even further from the malls.

Below, Hugh Hendry’s Seven Part Interview on Euro CNBC (and subject of Pigpen’s latest man-crush)

subsequent parts 2-7 below:

http://www.youtube.com/watch?v=ExbTVThFyOE&feature=related

http://www.youtube.com/watch?v=KuN5k4TAD2w&feature=related

http://www.youtube.com/watch?v=95Y6TuyLNgI&feature=related

http://www.youtube.com/watch?v=T-SM6vOD2wI&feature=related

http://www.youtube.com/watch?v=xE_35EHiIM0&feature=related

http://www.youtube.com/watch?v=bOnrAPndZqE&feature=related

More HH: “I want to short people like myself.” What bright honesty.

Recession Spreads to Suburbs and Beyond (CSM)

“Official” Unemployment 9.5%, Real Unemployment 16.5% (Kos)

The Misery Index (HuffPo)

“Its the Real Economy,” and Heard Around The Comment Threads:

See the ABB results in today’s daily highlights.  Orders declined 3x more than revenues have declined and are down 35% vs Q208.

…Expect industrial output to collapse further.  Long-lead industries still haven’t been hit by the recession, ignoring the decline in new orders.  Large factories are staring down huge holes in their schedules and are pre-planning months of shutdown in 2010.  The layoffs haven’t even begun.

There’s been a relative rebound to somewhat restore short-lead inventory levels, but the revenue / output pain hasn’t even started for heavy industries that are still eating through older backlogs.

It’s not something companies are advertising… especially since revenues are currently holding due to old backlog…There is no new activity, but revenues haven’t fallen off yet in line with the total lack of orders.

Take a look at new order decline vs revenue decline at long lead manufacturers.  Or take a look at new large construction projects (hint: there aren’t any).  Just because a company has a backlog doesn’t mean it has work.  You can have a backlog for orders you won’t have the parts to work on for another year or more.

…in most cases backlog orders can be canceled…. and if the cost to cancel is lower than the cost to take delivery guess which outcome will occur? many orders can be canceled without penalty…

In discussions with a Canadian exec from one of the world’s largest principally-electrical-engineering-related heavy manufacturers, it is clear to me that the order book for long-lead items is basically bare for 2010.  There are few orders anywhere for steam turbines, transformers and associated gear.  The OPEC members are generally demanding a 40% price reduction to even consider placing orders.  When you fly a senior global exec overseas for 20 hours to glad-hand during the Stampede, it’s a bad situation.

By Barriacade Contributor Michael Turner.

While the President and the Democrat Congress set out to overhaul our nation’s healthcare system, the people of America need to ask themselves, “Are we ready to ruin the quality of American healthcare for the sake of government issued insurance for everyone?” I am a primary care physician who works in emergency room near Austin, Texas and I promise you that if we nationalize our healthcare system we will ruin the quality of our healthcare.

We already have healthcare for everyone. Our emergency rooms act as defacto 24 hour primary care clinics (no appointment necessary) for anyone who wants to be seen for any ailment whatsoever. Approximately 90% of my patients in the ER come for non urgent reasons that are more appropriate for primary care office visits(colds, flus, chronic aches and pains, etc.). Almost all of these patients are either uninsured or have government insurance in the form of medicaid or medicare. They come because the ER turns no one away. While they are expensive, ERs are very flexible in terms of working with people on payment plans. There is no inalienable right to free healthcare, just as there is no inalienable right to free food or free housing. As long as there are emergency rooms there will always be access to healthcare for everyone. It just won’t be “free”. In addition to emergency rooms, there are countless indigent and community clinics which offer free and/or low cost services. Most importantly, in the 13 years I have been practicing I have never had a single patient who was unable to receive access to standard of care treatment due to lack of insurance. I have always been able to either treat the patient or get them to the appropriate specialist they need. I have never come across a patient who was in serious need of a treatment or procedure, but was denied access due to a lack of funds. Quite simply, there is no actual national crisis of inaccessible healthcare. Any purported crisis of inaccessibility is a ploy by our politicians to justify taking control of your healthcare. If they can do that then it will be much easier for them to control your vote.

If the federal government takes over our healthcare system the only real changes will be in expense (the cost of a nationalized healthcare system will be staggering) and in quality of care. I trained at one of the largest VA hospitals in America, the Audie Murphy VA hospital in San Antonio. The quality of care at the VA was vastly inferior to the private hospital next door. The wait times for VA services were at least 4 times as long as the wait times for the same services at the private hospital next door. The two hospitals were joined by a corridor bridge, and the contrast between in the quality of care on one side of the bridge versus the other was obvious. Nationalized healthcare systems the world over are plagued with excessive wait times. In Canada the average wait time for a referral from a primary care doctor to a specialist is over 16 weeks. That is absolutely unacceptable. In Britain 1 million sick citizens are currently on waiting lists for hospital admissions. Another 200,000 are waiting just to get on the waiting list. Imagine having your healthcare run by the same people who have you wait in extremely long lines just to get your driver’s license renewed, and trying to run it on a massive scale that has to account for 300 million people. Take a number.

America is the world leader in medical innovation and expertise. Our current system provides both financial and professional incentive (especially in the area of professional autonomy) for the very best and brightest minds to undertake the extremely long and difficult path to becoming a physician. Nationalization will inevitably substantially decrease these incentives. We will no longer have the best and brightest minds choosing that very long and arduous path. This will lead to a profound deterioration in the competency level of our nation’s physicians. In short, our political leaders are measuring the state of our nation’s healthcare solely from a perspective of coverage, and not from a perspective of quality. This is extremely flawed. The overhaul is all about coverage at the expense of quality. In short, our politicians are asking us to spend trillions of dollars so that we can have a healthcare system plagued with excessive wait times and physician incompetency all for the sake of giving everyone a guarantee of “free” government health insurance. To quote Tommy Callaghan (Chris Farley) from the movie “Tommy Boy” : “Hey, if you want me to take a dump in a box and mark it guaranteed I will. I got spare time.”

Why are heading down this path? The quality of American healthcare is second to none. It’s one of the things we do best. When Canadian Member of Parliament Belinda Stronach needed breast cancer surgery for herself in 2007 she headed to California and paid out of pocket rather than go through the wait of the Canadian system. When Italian Prime Minister Silvio Berlusconi needed heart surgery in 2006 he went to the Cleveland Clinic. The quality of our healthcare system is second to none. Why are we about to turn our healthcare system on its head? Obviously this ”reform” is being done in order to curry votes. Unfortunately, I don’t think most Americans understand how devastating this is going to be. We truly live in an age of medical marvels. Our cumulative knowledge, expertise, and ability to battle a constellation of diseases and maladies is lightyears beyond what it has been in any previous era of human history. But somehow we are being told on a daily basis that we have a healthcare “crisis”. I see our system at work on a daily basis right on the frontlines of healthcare. As an ER physician I am the primary care provider to the uninsured , to the illegal immigrants, to the poor. I see how the system works every day. We do not have a health care ”crisis”. There is always room for improvement, but we do not have a healthcare crisis. Rather, we have a care about health crisis. Meaning we have leagues of people who don’t care enough about their health to do some very basic preventive health measures that would save this country hundreds of billions each year in health care costs.

I recently did a survey in my ER and found that 75% of all the patients I see smoke, and that 65% of my patients smoke a pack a day or more. The overwhelming majority of these patients were either uninsured, or on medicaid or medicare. Most national studies show that uninsured people are roughly twice as likely to be smokers as insured people. Smoking is just about the most harmful thing people can do to themselves. Tobacco will kill and impair a person in many more ways than any illegal drug can, and every year it is our nation’s leading cause of death, with approximately 430,000 - 450,000 American’s dying from tobacco related illnesses. To put that in perspective, roughly 90,000 people die each year from alcohol related illnesses and many fewer from other drugs. Our second leading killer is obesity, which kills 300 - 400 thousand people each year in obesity related deaths. Obesity is a well documented epidemic in our nation and even moreso amongst the uninsured. Both smoking and obesity account for hundreds of billions of dollars each year in health care costs in America. Obesity is a complicated problem, as many people suffer from genetic factors that predispose them to it. But smoking is a choice. And as nation it is the most costly choice we make. In this day and age, with all we know about smoking, it is difficult to understand why anyone would smoke. After spending years counseling people to quit, I have realized an inescapable conclusion: if a person smokes, he (she) simply does not care about his (her) health. Some people may think this is an oversimplification. But after years of dealing with very ill patients who continue to smoke despite suffering from the complications of smoking, it has become obvious to me that instead of being an oversimplification of the truth, this conclusion is simply true.

This is the real crisis we face. We can not destroy the quality of our healthcare for the sake of vote currying by politicians who pander to a segment of the population that has such a staggeringly high percentage of smoking. As a people, before we demand that others pay for our healthcare, we should be required to actually care about our health. We should not smoke. Ever. This is a very poor bargain our politicians are striking.

I am not one to complain without offering an alternative. There is one thing we could do that would have a greater benefit to our nation’s collective health and healthcare costs than anything else: we could illegalize smoking. The yearly savings in lives, healthcare costs, and disability costs would be astounding. The savings would be so great that we would never have to hear the term “healthcare crisis” again. All it would take would be for some congressmen to write the bill and for the president to sign it into law. Total costs of paper and pens to do this would be less than 100 dollars. If they really cared about your health (not your votes, and not their campaign contributions) they would do this. At the very least it would make sense to try this before systematically overhauling our healthcare system into a nationalized system. But, of course, in order to pass such a law we would probably need congressmen who don’t get campaign contributions from Big Tobacco, and a President who doesn’t smoke. Looks like we are out of luck on both counts.

Are You In This Camp?

One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed’s balance sheet will automatically lead to a quick and substantial rise in inflation. An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called “shadow banks”. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.

For example, total commercial bank loans have declined over the past 1, 3, 6, and 9 month intervals. Also, recent readings on bank credit plus commercial paper have registered record rates of decline (Chart 1). The FDIC has closed a record 52 banks thus far this year, and numerous other banks are on life support. The “shadow banks” are in even worse shape. Over 300 mortgage Quarterly Review and Outlook Second Quarter 2009, entities have failed, and Fannie Mae and Freddie Mac are in federal receivership. Foreclosures and delinquencies on mortgages are continuing to rise, indicating that the banks and their non-bank competitors face additional pressures to re-trench, not expand. Thus far in this unusual business cycle, excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent. The 100% plus expansion in the Fed’s balance sheet (monetary base) has done nothing to rekindle borrowing and lending or revive even the smallest spark of inflation.

What is clear is that as long as private market factors in the monetary/credit creation process are shrinking, as they are now, the risk for the economy is deflation, not inflation.

A reply from a Barricade contributor:

My working thesis is that we’ll go down the debt-deflation road with Fed and the Whitehouse fighting it all the way, in bolder and bolder moves.  They’ll use all means necessary to re-inflate, such as direct low-rate lending, new social programs, debt relief programs, and further direct injections.  During this time, the dollar is likely to climb as the dollar retains the global reserve status (ie, tallest midget in the room) and fear mounts.  We already see this: every time there’s an equity selloff, we see the dollar and 10-year spike almost in lock-step to the inverse S&P.  However, given the scale of US total debt to GDP, there’ll be a point of inflection where the world just won’t accept the absurdity of our currency manipulation, debt creation, and/or QE in order to preserve our former way of life.  At that point, we’ll see the dollar (and treasuries) collapse.  The big question is when that inflection point will be.  One mitigating factor, however, is that the US still has the most powerful military around, so that will certainly affect how quickly other governments will give US the finger (wrt to buying US paper).

My main interest at this point is explore the China-US relationship more closely.  My primary concern is that a significant decision in policy (e.g. switch to a floating exchange) is ultimately in the hands of the senior most Chinese and American officials, meaning that such change is only likely to occur at the hands of certain individuals (not by market forces).  Sure, market forces will ultimately force their hand, but it’s tough to say with gov’t data and press manipulation how much time and/or pain will have to occur before that date.  For example, if China were to stop buying US debt tomorrow, we’d likely see the US markets crash within a week.  So, to me, the most interesting (and lucrative) speculation is what the conversation of Geithner, Bernanke, and the Chinese leadership is behind closed doors.  Without that piece of the puzzle, it’s to difficult to figure out a timeline for how exactly things will unfold.  I’ve heard stuff all over the map: that China’s stability depends on a suppressed, poor populace (and will continue to send all capital overseas at all costs), or that China is waiting the cut the strings at the worst possible time.  There’s all kinds of wild theories out there.

Meanwhile, who knows just what the heck is going to happen once we get past 2Q earnings–talk about uncharted territory.  That’s where I think the deep waters start; past 2Q, all major costs will be cut and the top lines will finally start driving bottom lines.  The upside in whatever upside is left in the S&P is VERY expensive, risk wise, in my view.