"The Wile-E-Coyote Market"
by Karl Denninger
"Debt doesn't matter - right up until it does. So goes the chestnut. In actual practice, however, it's much worse: Increasing debt tends to make equity valuations go up right until it matters, then it makes them crash. There is exactly zero attention being paid to this. But the truth of it is found in every recent, and in fact all the nasty historical drawdowns in the market. Let's just go through a few of the really bad ones, specifically:
All of them shared the same basic paradigm.
In 1873 it was long-term railroad debt centered on the premise of silver mining. When that blew up it put the US into Depression and destroyed market valuations in a form and fashion deep enough that it became known as the "Long Depression"; a moniker and derisive standard that stood unchallenged until the 1930s.
In 1929 of course it was both stock market margin debt along with real estate, much of it in Florida, that led to the 1929 crash and the government's intervention led to the 1930s Great Depression.
In 2000 the accumulated idiocy of internet companies running on a "cash burn" model, a "business mode" that distills down to "we don't need to make money, we'll just borrow it" (said "borrowing" coming from issuing worthless shares into a white-hot IPO market) led to the crash of 2000-02.
And in 2008, of course, it was the outrageous practice of issuing worthless debt for all manner of housing and commercial real estate, much of it repackaged into various exotic instruments for the very purpose of hiding the risk and fraud they contained, that led to the collapse of the housing market, the stock market, and nearly the entire banking system.
Today we are doing the same thing. We're just hiding it differently, exactly as has been done with all other instances of the same scam. It's very necessary, you see, to use a different place in the economy to run the scam and to make it nice and complex because if you try to run the exact same one or make it too simple then people will point it out.
Today we're promising to pay pensions and health expenses with money that not only doesn't exist it never will exist. Kentucky is just one of the states attempting to do this where just for teachers alone they are now trying to demand (extort, really) over $2,000 per person who lives in the state - just for this year. They won't get it, of course, but they can and will pretend they got it even though the books don't balance.
Our local county government here claims to have seen a 15% annual increase in health costs for employees. Meanwhile Obamacare policies for Florida were just approved by the State regulators - they're up 45% for next year on average. No, that's not a misprint.
Over the last four years the unsubsidized cost of health insurance on a like-for-like basis in Florida for a family has more than doubled, now topping $17,000. This means that if you make $50,000 a year more than one third of your pretax income would go to paying that bill. Utterly nobody who makes less than $150,000 a year can afford this and the number who make over $150,00 a year amount to a tiny percentage of the entirety of the population.
Nobody in their right mind who is healthy would pay $17,000 for such a "policy" to "cover" their family either, at least not willingly. To prevent the immediate collapse of this scam in the 2008-2010 timeframe Obamacare was passed mandating that you buy said "insurance" and then the government stepped in with subsidies for some, allowing people to claim they "could" afford it. In fact that's a lie, of course, because robbing one person to pay the premium for someone else doesn't make it more-affordable - it just hides the theft with exactly the same effect as in 2006 and 1999!
If you look at the actual GDP of the country - that is, what it really produces, you would not count net new borrowing that is unsecured by an asset (that is, for which an asset's title was not exchanged.) All government borrowing is unsecured. It was obvious in the mid to late 1990s that the health care monster would devour sufficient funds that net income could not support the expansion in cost; even then I was seeing 10% annual increases in health insurance expense for our employees, and on a compound basis what was due to happen was obvious. Ten years later it happened, and from that point forward we have never actually had any economic expansion at all in real terms because government emitted credit, all of it borrowed, has canceled all of said "growth."
The Federal Government has emitted approximately 7% of economic output per year in new debt since the 2008 crash which is far greater than any economic expansion recorded. In other words the net-net economic output of the nation has been negative each and every year since that time.
In point of fact this means we are today in an economic depression that we are papering over and have been since the 2008 crash. We are doing it via the same mechanism we did it the last time - through emitting unbacked credit just as was done with liar loans in the housing market and bogus sales of worthless stock certificates. It's just much larger and done by the government, aimed at a different sector.
The problem isn't the cost of insurance. It's the cost of health care, which continues to go up at double-digit annual rates and that must not just stop it must be collapsed by a factor of 80% or it will destroy the economy, our markets and our way of life.
Again this has already forced the federal government into borrowing enough to literally cancel all economic growth since 2008; we have not printed an actual positive figure adjusted for said borrowing since the crash!
WE HAVE BEEN LIVING A BALD-FACED AND INTENTIONAL LIE, CONTINUING TO COMPOUND THE ECONOMIC DAMAGE, FOR NEARLY TEN YEARS AT THIS POINT IN TIME.
It was obvious in 1998 to me, as a person in the Internet business, that the IPO market was riven through with fraud and bogus claims. I had companies that were "newly public" coming in asking to "partner" with MCSNet who, on a quick back-of-the-envelope analysis, could never survive and if I had done so when they blew up they probably would have taken my firm up in smoke with them. (For an example of this look at Winstar; they blew up and took Lucent down the chute as collateral damage, destroying one of the most-storied firms in the history of American industry!)
The market continued to ignore this for two full years and in the second of those years the Nasdaq doubled, despite the fraud. Then it all blew up and went to Hell.
Likewise in 2006 it was obvious that the zero-doc fraud loans were everywhere. I had people knocking on my door - Realtors - trying to buy my house out from under me on Saturday mornings even though my home was not listed for sale. This was a nearly every week event for close to year. It was that nuts, along with the at least one-a-week blind solicitations from developers in this area trying to get me to buy blocks of not-yet-built condos (10 at a time!) and flip them, promising "riches" and all using levered credit - which they would facilitate, of course. Those who got involved mostly got butt-rammed and were bankrupted when their several million dollar levered real estate positions turned into smoke; more than a couple people tried to get me involved in "helping" them in the aftermath, all of which involved requests to find ways to avoid being rendered penniless by somehow screwing someone else. I declined, in most cases quite impolitely.
Today, as in 1998 and 2006, there are exactly zero politicians who will take on the fraud machine, now accounting for nearly one dollar in five that is circulated in our economy every year. They have papered this over through false claims of "GDP" that include government borrowed money, which is an outright scam: If you borrow $5,000 to go on an expensive cruise you would not claim to have increased your output by $5,000!
Nonetheless the politicians and policy wonks on TeeVee will not tell you the truth and you're either intentionally ignoring the truth or are too drunk, stoned or both to bother paying attention.
For their part the politicians and regulators will not mandate price lists be posted, they will not mandate that non-discriminatory billing be enforced even though when it comes to goods it's the law and has been for nearly 100 years when not doing so serves to lessen competition (Robinson-Patman) and they will not enforce anti-collusion and monopoly laws also standing on the books for more than 100 years that declare any such act that intends to or does lessen competition as a felony carrying heavy prison terms and ruinous fines (Sherman / Clayton.)
There is not only no new law required to put a stop to this crap it could also be addressed via consumer protection laws on the books in all 50 states which declare that any sort of deceptive practice is a per-se violation. Refusing to publish or provide a price until after you are obligated to pay is by definition deceptive.
I repeat: This could be addressed at the federal or state levels and yet not one of said government organs will do so. They are all aware of this and give you, the citizens, the finger on a daily basis. Instead, just like in 1999 and 2007 everyone involved "cheers on" the "economic growth" that such scams appear to put on the board, despite the fact that such "growth" is false - no such expansion has actually happened.
You can bet that just as with the "mortgage brokers" who all made a nice chunk of cash while bilking everyone involved during the housing bubble the same dynamic is taking place with "medical coders" and other "administrators" right now in that realm. Yes, those salaries are real, but the scam is also real, and that's how they're being paid - it's all by naked shorts on the currency emitted by the Federal Government and bond issues at the state level rather than via expansion in economic output.
But housing was never 1/5th of the economy and neither was tech; they were much smaller. When the medical scam blows up, and it will far sooner than you think, it will be far worse than either 2000 or 2008. Much worse than the financial impact (which will include the complete destruction of the stock market, bond market and municipal finance) will be the fact that it will come with death for a couple of million Americans who have been led down the primrose path of "chug this drug" instead of cutting the crap on what goes down their pie hole. When the drugs and procedures are cut off because there's no money there will be no alternative available but a 6' long and deep x 3' wide trench in the ground.
So yeah, we have a market crash coming folks, one far worse than the last two. It won't be long in coming either with 45% premium increases and 15% annual increases even in heavily-negotiated municipal government health costs.
But it's not that which ought to be the reason for you to give a damn, although you don't and won't. It's the fact that this crash is going to kill several million Americans on top of it - directly and quickly - and that among those millions will almost certainly be someone who you know and care about, if it doesn't include you personally. When it happens, not if, and it's your Grandmother, Mom, Dad or kid that dies I will have exactly zero sympathy and in fact I will cheer that you will have gotten the just wages of your intentional refusal to put a stop to this crap.
For the last decade I've been raising hell about this very issue, along with putting forward ways to stop it, and statistically identical to zero percent of the population, including but not limited to every political party (major or third party) has not only ignored the issue they've spat in my face and refused to enter the debate with a desire and intent to demand and implement solutions, starting with enforcement of existing laws.
For nearly 10 years I've been raising Hell on this very page and in fact since the 1990s this has been the feature of my political commentary and involvement. I'm a very patient man but said patience is not inexhaustible, and the time for this response from me on a blanket basis to essentially everyone, unless action is taken now, is rapidly approaching:
Mr. Denninger's expressive graphic is as originally found.