Use access key #2 to skip to page content.

goldminingXpert (28.79)

Can we talk?



September 02, 2009 – Comments (11)

About the real economy, and the real economic depression we are facing now? Or must we continue the charade of talking about goblins, new bull markets, unicorns, economic recoveries and leperchauns? If you're into discussing reality, you might find the following article from Karl Denninger interesting. If not, I hear there's leperchaun talk on TV right now, just flip that dial to CNBC to catch a Mad Money re-run.


Why Our Economy Is Utterly Screwed

 Karl Denninger

Steve Liesman once again stunned me with his lack of understanding of matters economic today, when he commented that "in all recessions since 1970 at least the original part of it (recovery) has been jobless."

Yes, Steve, but why is any of this a surprise?  What part of this graph isn't instantly obvious to anyone with more than two firing neurons in their head?


That's credit and population growth normed to a base of 1970.  Population went from roughly 205 million to roughly 304 million during that time, a 50% increase.

Outstanding consumer credit went from $128 billion to $2,525 billion, or a 1,973% increase - and this is only consumer credit, ignoring mortgages, financial firm credit, business credit, commercial real estate and of course government debt!

Why are we not seeing "robust" economic growth when we exit recessions?  Why is there no real hiring going on?  Why can we not have a robust economic recovery?  Why are we are replacing good jobs with "McJobs" that pay half as much - or less?  And more importantly, where did all the "so-called prosperity" really come from, especially from 1994 on?

In each and every instance of recession from 1970 onward we have "pulled forward" more and more demand and created fake "prosperity" through the creation of ever more debt that we have goaded consumers to take on.  By doing so we have crippled the ability of the economy to grow, redirecting as much money as possible to a handful of people and firms (commonly known as "banks" and other "financial companies") instead of directing that effort and money into productive enterprises such as building cars, television sets and similar items.

THIS time though the recession didn't come from "ordinary business conditions"; it instead happened because the credit carrying capacity among both consumers and businesses hit the wall - they could no longer make the debt service payments and started to default. 

It began with "subprime" mortgages but that was nothing other than the first "hiss" of trouble out of the pressure vessel as the structural integrity of the fraud-laced credit system, where "capacity to pay" became a bad joke, had begun to disintegrate.

We pushed the envelope of fraudulent credit creation and the sale of fraudulently-underwritten debt too far - and it blew up in our collective faces!

Rather than admit complicity in the myriad Ponzi-style scams that underlay all of the financial system for more than thirty years (or have it shoved in their face) The Fed and financial "wizards" along with The Bush Administration (who was responsible for and complicit in refusing to fix the fraud during the 00-07 timeframe) chose to try to sweep it under the rug with "yet more liquidity" and "yet more lending."

President Obama and his administration made a critical error after having won in November by refusing to stand up and take these scammers on face-to-face.

He decided to instead continue and even accelerate the scam!

It can't and won't work because the underlying issues have not been resolved and the bogus debt has not been forced out and defaulted - it remains clogging up the system, destroying the ability of the credit-intermediation system to function properly.


Folks, the facts are impossible to ignore.  We are in this recession because consumer and business borrowing capacity hit the wall.  We have removed almost none of that outstanding credit from the top to today, as this chart shows (which I have printed here an endless number of times!)

We have taken a measly 4.5% off the maximum outstanding credit amount (incidentally reached in January of this year) to date.  4.5%!  That's nothing - it is absolutely insufficient to return the system to normal functioning and restore sound economic growth - we need five times or more that much contraction!

The bad news folks is that we will get that contraction, and if The Government and Fed do not force it to happen "voluntarily" we'll get double that much - as much as a 50% decrease in outstanding credit - coupled with a deflationary credit collapse.

The small crack in the market the last few days is a warning: The fraud-laced game is about up and we are running out of time to do the right thing.

Stop listening to the media idiots - they have not and will not discuss this facet of the crisis because doing so means admitting that their corporate parents are a huge part of how we found ourselves in this mess, along with all the advertising they've stuck in your face for the last 30 years to "go on, buy now, pay later!"

But irrespective of whether CNBC talks about it or not the mathematical reality of credit capacity as it relates to both population and earnings capacity is a mathematical reality.  No amount of magical handwaving will change it, leaving us with only two choices: we either force the bad debt out into the open and default it, thereby shrinking both the balance sheets of banks and consumers (at the same time) or we continue to try to "press our bets" and take the risk of a second credit-system dislocation that will be far worse than what we experienced last fall and this spring.

At present we are choosing path #2 - a river that is quickening in pace. 

Does anyone have an idea what that funny roaring noise around the next corner might be?




I'm not sure if this link is correct, I'm on a secured internet connection that changes all the web addresses.

11 Comments – Post Your Own

#1) On September 02, 2009 at 11:20 PM, goldminingXpert (28.79) wrote:

If somebody could post the graphs, that'd be awesome, I'm on a borked internet connection.

Report this comment
#2) On September 03, 2009 at 9:38 AM, MikeGi (21.34) wrote:

First Pic:



Report this comment
#3) On September 03, 2009 at 11:23 AM, russiangambit (28.79) wrote:

Apparently, nobody wants to talk about the real economy or how the things really are.

I had a hard time understanding today's CNBC headline for example  on the unemployement numbers. It was talking about reduction in unemployement claims.

So, let me see - last week we had 570K, not revised to 574K. This week we expected 560K, instead we got 570K.

But because last week was revised down to 574K, this  week shows an improvement for 4K. Green shoot!

Report this comment
#4) On September 03, 2009 at 12:02 PM, Bays (29.25) wrote:

Are those numbers adjusted for inflation?  Either way, still astonishing.

Report this comment
#5) On September 03, 2009 at 12:26 PM, helicopterfool (97.21) wrote:

Great Post

Report this comment
#6) On September 03, 2009 at 12:37 PM, StrongTrader (< 20) wrote:

x2 russiangambit.

No one wants to talk about the real economy because they would rather live in bubble land. People NEVER learn. With two bubbles in less than a decade you would think they'd wise up. NO WONDER the government is able to launder money off the citizens so easily. As I always say, the government feeds off the stupidity of the mass. 

Just yesterday I was told by a bank manager that the housing recovery isn't all that it seems. The reason is because banks are holding a large portion of their inventory and not releasing them on the market. The banks would put a few (<10%) of their total inventory out in the market in an attempt to artificially drive up the demand thus in return home prices will increase. On top of that houses I was also told that homes that should have been foreclosed haven't had it yet because banks do not want to add more to their inventory. WOO HOUSING MARKET HAS RECOVERED. Yeah right. Take this with a grain of salt if you want since it's only been passed to me through words of a bank manager. However the scenario presented above is very plausible given the way our economy has been functioning lately. 

Summer has also been proven to be a season historically in which people are usually out buying houses. Early winter and 2010 will tell the tale of what position the housing market is really in IMHO. We also have the option ARM resetting within the next four years. That will no doubt bring about a flock of foreclosures when people are unable to make their month mortgage payments. 

Report this comment
#7) On September 03, 2009 at 7:31 PM, MrSucrose (< 20) wrote:

The weird thing to me is that everyone is looking for the boogeyman, almost expecting something awful to come, that I wonder if this reality check wont be delayed some.  Mind you I think we are going to correct to below SP800, but I think it is going to take some shocking event to make the market break from its psych gravitational pull to SP1000.  

For example everyone is expecting bad news on Com real estate--so whenever the bad news comes, for some stupid reason I expect there to be some spin that says "Well that wasn't as bad as I expectd" and the market will rise slightly. This is the way its been going since we broke SP1000.  It is going to take something horribly shocking to trigger a move.

Basically the last two times we have seen 1015 I bought Dec puts, as the market dropped to a 1000 I sold.  about 20% gains both times.  With this range bound crap I am having a hard time commiting funds long, because economically the nation is in a whole, and am taking a traders view on picking shorts, because I don't understand the psychology that is keeping this market elevated. 

Report this comment
#8) On September 03, 2009 at 11:13 PM, jester112358 (28.19) wrote:

Great post again.  One of the reasons why you and ultralong have become the most recommended bloggers here.  Keep up the good work.

 Advice for this range-bound market.  Sell out of the money call  and put spreads (net credit spreads) with expriry less than 4-6 weeks.  Then let time make your profits for you as the options expire worthless.   And since you're hedged on the spread, any losses are nicely defined.  This is much better than selling covered calls but can be thought of as a synthetic covered call strategy but requiring much less risk capital.

Report this comment
#9) On September 04, 2009 at 12:14 PM, dragonLZ (88.47) wrote:

GMX, don't worry, I'm not gonna comment here... :)

Report this comment
#10) On September 05, 2009 at 3:07 PM, checklist34 (98.69) wrote:

at the plant where one of my former businesses co-habitates with another, the other business was in Dec/Jan producing about $90-100k/day to producing 160-180k/day.  The peak in 06/07 was 200-220k/day. 

They went from 4 day work weeks and layoffs to mandatory overtime and saturdays.  

Soon, I would imagine, they will get tired of overtime and do some callbacks.  

And there beginnith the process of turning around.  Is that a Green Shoot?  Did cash for clunkers cause that (actually, it may have contributed)?  

Business at my former companies is up despite them being heavily tied to cars and construction.  That noted the rocket-ride growth of 05/06/07 has certainly tapered off, at least for now.

we will live to see another day :)

Report this comment
#11) On September 06, 2009 at 1:29 PM, Buckaneer (< 20) wrote:

GOLD, Correct about the crashing to come. However, your timing is HORRIBLE, as has been mine. In other words, the DOW is likely to get to at least 10,000 with the S&P to 1100 through this year - all the money be thrown at it from govt. Your predictions of stock market re-drop will not happen until 2010. I have learned that timing is everything, and your SUCKS. mine has too.

Report this comment

Featured Broker Partners