Bear Mountain Bull

Karl Denninger has never been accused of wearing rose-colored glasses. But at the rate we’re going, it’s hard to argue with his take on where things could end up:

This story is by no means finished.  The government has spent $2 trillion it does not have and has committed to nearly $6 trillion more in either guarantees or outright payments, and yet capacity utilization continues to drop, employees continue to be laid off, consumption continues to fall and frantic attempts to pay down debt and avoid default continue to rise.

In response the economy has continued to shrink and tax revenues have sunk through the floor, skyrocketing the deficit.  Treasury apparently detected a reluctance among foreigners to continue buying our used toilet paper and changed the rules on reporting of “indirect” sales – which then, even after the change to intentionally overstate foreign interest, have precipitously declined anyway.  It is fair to say that foreign interest in Treasuries is all-but-exhausted and barring a collapse in equity prices to recreate a “fear” environment for holding government bonds, there is going to be an increasing problem with funding the insane “prop up the game” money flood policy of The Fed and Treasury.

California is just the beginning of this unraveling; they are now issuing IOUs.  Most other states will find themselves in similar circumstances and be forced to dramatically curtail spending along with raising taxes.  The public labor unions (state and federal) are currently able to prevent their overly-fat pension and benefit programs from being brought in line with private industry, but this will not last forever, and when that wall cracks it will come with ferocious intensity.  The “death spiral” of higher taxes leading people to erect their middle finger and either cocoon, go underground with their earnings, or depart has begun in California and will spread – count on it.

At some point reality must be faced, and we may as well do it now while we still have civil order.  Those politicians, numbering nearly all of them from both parties, who argue that this can be “avoided” or that we can “support housing (and/or asset) prices” need to be run out of town on a rail.

There is no way to prevent the unwinding of leverage when the carrying costs exceed income and the more debt we as a society take on in trying to do so the worse things will get in the end, as we are simply adding to the pile of defaults that must occur.

I am quickly running out of possible scenarios to prevent a severe deflationary depression from taking place.  By “severe” I mean 20%+ U3 unemployment, GDP contraction of at least 25%, and a possible loss of federal funding capacity leading to the immediate destruction of Medicare, Medicaid and Social Security, a 50% reduction of defense spending and near-complete-elimination of all other Federal Programs due to a “sudden stop” in the ability to fund Treasury issuance.  Yes, it could get that bad, and it could happen a lot faster than you think.

I wish there was good news – “green shoots” – that I could honestly find and report.  There are not.  There is only more obfuscation and fraud, which I have and will continue to chronicle here in The Ticker, not so much in the belief that government gives a damn, but rather so that historians have it available later and, if the collapse I believe is possible does materialize, the angry proletariat with pitchfork and torch will know where to properly direct their wrath.

Government needs to lock up the psychopaths that have run the asylum for the last 20 years and let adults into the room to rationally discuss the inevitable and how to best deal with it.  They’re refusing now, just as they did when Bush was President.  This is not a partisan debate – even having lost badly in November the Republicans are wasting time with the same old canards about “Tax and Spend” instead of attacking the problem at the root: fraudulent credit issuance, much of which they championed and enabled themselves.

Happy Independence Day