The End of the End of the Recession

[Jan Klimkowski]

I agree with Zero Hedge.

Deflation is going to be the killer for western economies, particularly the US and Britain, with their ridiculous emphasis on consumer spending and Wall Street/City of London as engines of growth.

Future debt has been pulled forward in time. But it still exists and has to be dealt with.

Karl Denninger has written a companion piece to Zero Hedge's excellent analysis here. The graph at the original url is worth examining:

Sunday, July 26. 2009
Posted by Karl Denninger in Federal Reserve at 22:54

Bernanke Dissembles; The Economy Burns
You didn't really expect Bernanke to go quietly into the night without trying to "rescue" his legacy, did you?

“The problem we have is that in a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system,” Bernanke said today at a town- hall-style meeting in Kansas City, Missouri, taped for broadcast on PBS television this week. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”

No Ben, the problem we have is that when you fail to do your job for the entirety of the time you have it, that is, policing the safety and soundness of the banking system, putting a stop to predatory, impossible-to-pay loans such as OptionARMs and ridicuous commercial real estate lending, blatantly false and "bought" ratings and every other manner of credit pumping, you find yourself sitting on the precipice of implosion - which you then used to justify even more idiotic credit creation and lies.

Let's face reality right here:



This is the problem.

In 1981 the total outstanding private debt was somewhere around $4.5 trillion. Today it is somewhere around $53 trillion.

That's about $50 trillion of GDP that got added to the system over a period of about 30 years, all of which was "false" GDP - that is, pulled-forward demand.

Most important is the SLOPE of that graph and the fact that Ben Bernanke was part of The Federal Reserve during the entirety of the acceleration in the move beginning with the 2000 recession.

The crisis erupted because of that graph - we "hit the wall" and were unable to service any more debt. That is why the system came close to collapse.

Now let's face the ugly truth: We can't keep piling up more debt to pull forward more GDP. We can't add $2 trillion or more a year to debt as a means of doing this, but that's what The Government is now attempting since private credit has actually contracted for the first time in modern (post-war) history.

It won't work and it can't work.

Therefore GDP must contract to a sustainable level.

Bernanke's "tonic" is to allow financial institutions to lie with the premise that if they lie for long enough they can "earn their way out" - that is, charge you 30% interest rates on your credit cards and slowly but surely retire all that excessive debt.

The problem with that is the amount of time required. There is at least $2 trillion of additional bad housing-related debt on the books (we've written down $1 trillion or so of it) and then you've got credit cards and commercial real estate. The former we've probably taken care of 1/3rd of what has to be done, the latter almost none of it.

Nobody wants to face the facts here but the math cannot be argued with. To get rid of $5 trillion worth of bad paper (a rough estimate of what remains) we would have to slice $500 billion off GDP for the next ten years. That's 3% or so - for ten years. Or we could do it in five years, at a 6% penalty.

This of course does not take into account the contribution that this debt accumulation has made to GDP, which has already disappeared. How much impact has this made? Likely 3-4% on its own, which is why we're printing negative numbers now.

If you are betting on an economic recovery - an actual recovery mind you, which is what the stock market is pricing in - you're betting that the banks can "earn their way out" without any impact on GDP forward, and that without the excess credit creation GDP can advance. Alternatively, you believe that the US Government can add $2 trillion to the Federal Debt this year, $2.5 trillion next year, $3 trillion the year after that and so on, replacing private credit expansion.

Now tell me folks - do you really believe that. Do you believe that within the next five years we can sell $200 billion of T-bills a week, every week?

Do you believe that the consumer only had to de-leverage by 2.5% - all he has so far according to Fed statistics - and that a mere 2.5% in excess debt leverage was enough to collapse the entire system?

No?

Well that's the bet you're making by believing in a durable market and economic recovery.

It is one thing to play the market for a bounce, or a dive. It is another to invest for the long term on the premise of economic growth and prosperity - that is, a durable economic recovery.

The former is always a play you can make (up or down) at any point in time. The latter is absolutely unsupportable given the facts - you need nothing more than the above graph and public GDP data to "get it", and every single person involved in policy-making, at The Fed and in Washington, knows the truth.

Bernanke is, to be blunt, afraid. He's afraid that he's going to get tattooed with (justified) responsibility for what has happened. For the unbridled and fraudulent expansion of credit vastly beyond what was sustainable. For refusing to remove the punch bowl in 2004, 2005 and especially 2006 when he took the helm of The Fed. For refusing to tell the truth. For refusing to lock down the predatory lending. For refusing to force market prices to be taken on everything, top to bottom, in 2006 and 2007.

No ladies and gentlemen, Ben Bernanke didn't "avert" something that just happened to occur, he engineered the mess himself and now is attempting to claim to be a savior, much as a fireman who commits arson calls himself hero when he puts out the very fire he set!

Beyond the obvious - that he set the fire in the first place - there is the secondary problem in that the building may no longer be burning, but it has been consumed by the fire and is no longer suitable for inhabitation.

Don't believe the hype and lying coming from our so-called "savior": The math is never wrong, and Bernanke is well-aware of his personal culpability, never mind the fact that his so-called prescription cannot work as he intends.

http://market-ticker.org/archives/1263-B...Burns.html