Greedspan: Stick A Sock In It

By Karl Denninger, The Market Ticker

This sort of crap really pisses me off:

In answer to a question about why rising debt is a concern, Greenspan said: “The critical issue that economists worry about” is the spiral that occurs with ever-rising debt and debt service, often followed by higher interest rate. As a consequence of that, “the debt service becomes explosive and that moves directly into the budget deficit,” he added.

Yeah yeah. If you read his testimony what you will find missing is any acknowledgment of exactly how it is that government gets the idea that it can run more than a trillion dollars in deficits in the first place!

I’ll tell you how, since "Sir" Alan won’t: You find a central banker that will kneel before Congress whenever the members drop their drawers by pumping so much liquidity into the system that real rates are in fact NEGATIVE, thereby LITERALLY paying people to borrow.

Of course the government has never met a free money handout it didn’t like, and political will for restraint is ZERO when faced with such a circumstance.

The solution to this is really quite simple: Don’t do that sort of stupid crap!

We continue to challenge Einstein’s General Theory of Insanity – you know, one of my favorite definitions?

Doing the same thing over and over but expecting a different result.

Greenspan was the architect (with Bernanke’s goading) of the "extended" 1% interest rates in the 2000-2003 time period, and now we’re at ZIRP.  But it didn’t stop there!  Bernanke went even further and monetized $300 billion of Treasury Debt and is on track to monetize $1.2 trillion of Fannie and Freddie paper, thereby effectively "negating" (for the purpose of the government) $1.5 trillion of government spending.

Of course this is all a bunch of arm-waving BS – you can’t "negate" such a thing, you can only shift where the damage falls.  And fall it will – in this case, right on the value of the currency.

The real question Greenspan should have raised (but didn’t) is where the line is on capital flight – exactly how far we have to go before the dollar loses all credibility in the international markets.  Continuing to try to monetize our way out won’t work, and Bernanke appears to understand this in that the latest FOMC statement rather forcefully says "yes we really are shutting it all down come February."

We’ll see about that.

My concern isn’t so much whether the "extraordinary programs" go away.  It is whether Bernanke will put a stop the Treasury issuance – a stop that must come sooner or later. 

He must realize, as do I and anyone else who cares to look, that the game has been lost.  The gambit taken in 2007 was that The Fed and Treasury could temporarily "stand in" for consumers and restart credit expansion. 

This gambit has now failed, as the below chart shows conclusively:

There is no way out of this mess that does not involve deflation.  Specifically, the debt outstanding must deflate.  This will in turn deflate prices in the market that have been overblown – in houses, in education, in public service.  It will deflate lots of multi-million dollar bonuses and fatcat pension payouts too.

I fully realize that nobody in government wants to see that happen.  But it doesn’t matter what people want at this point – we have only two choices: no durable economic recovery and the possibility of an economic and government funding failure, or accepting the consequences of deflating the debt bubble.

Those are the only two options.

The 900-lb Gorilla that stomped his first piece of china was found in the $290 billion debt limit increase – something that AP reported (perhaps accidentally):

Republicans - who helped supply votes to increase the debt ceiling just last year - unanimously opposed the legislation, which is required to issue new debt to pay for federal operations and deposit up to $50 billion into the Social Security trust funds.

Uh, Social Security wasn’t supposed to go negative – that is, require actual general fund expenditures – for another 20 years!

But now it was – and that’s a major problem.  How much is Social Security and Medicare actually in the hole here?  I don’t know – but the fact that we’re 20 years in front of where we should be in this regard is very ominous.

I realize that the government has a political aversion to the concept of austerity.  I realize that making promises with money you can borrow today and pay for never has become the American Way Of Life^tm.  But this sort of nonsense – this mathematically impossible path – cannot continue forever, and Americans in general have hit the wall.

Government has done its level best to extend, pretend and lie. 

We are out of the ability to do all of the above.

The Fed must withdraw its liquidity support.

Congress must stop spending money it does not have.

These two actions will not occur without pain.  But the pain will come whether we take these actions or not.  We have gangrene in our hand, and it is progressing up our nation’s arm.

We could have cut off the middle finger, where it began, in 2001 and kept the rest.  We did not.

We could have cut off the hand at the wrist in the summer of 2007, when I first identified the games being played with bank balance sheets, and kept the rest of our arm.  We did not.

We can cut off the arm at the elbow now, and keep the upper arm, as disfiguring as that may be.

If we do not, and the gangrene gets beyond the shoulder, it will no longer matter.

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