Posted 2011-09-22 09:58
by Karl Denninger
in Editorial

Welcome To The Collapse Of 2011

Welcome my friends to the collapse of 2011.

Remember the mantra that "consumers have delevered" which has been run over the last two years as an incessant bark from the media, attempting to goad you, the consumer, into more spending and more consumption to "lift the economy."

This claim has been a lie and a fraud upon the public and the new Fed Z1 makes this clear. The peak household credit liability was $13.92 trillion. It currently stands at $13.30 trillion, a reduction of a mere 4.6%.

This all came from home mortgages going ka-boom; $10.6 trillion to $9.9 trillion, a reduction of $700 billion. Total net reduction in liability was $620 billion; ex-mortgages consumer leverage has actually increased.

The DAX is now down nearly 10% in two days and the rest of the global markets are reacting in the same sort of fashion. This should not surprise; the same mantra of "we've de-levered" and "cash is at all time highs on the sidelines" has been claimed for years, and it's the worst sort of half-truth.

See, cash is indeed at high levels. But debt has gone higher, and yet nobody mentions the liability side. As an example non-financial business credit stands at $11.02 trillion, just barely down from the 2008 high of $11.15 trillion - and nearly a clean double from the year 2000 level of $6.21 trillion.

There's been no material "de-levering" at all. In fact the World Economic Forum claimed that in order to hit the "expected" GDP growth numbers we would have to double outstanding credit - that is, add $100 trillion in the next ten years.

But all credit comes with interest due, which means it is a forward promise to pay tomorrow for that which you wish to consume in some form or fashion today. This interest is a drag on growth as it forces transfer payments from the debtor to the creditor.

Now look closely at the following chart.

This is updated with the latest Z1. You've seen this chart dozens of times, and I'll get to history in a minute. But the ominous part of the chart is in fact right there... and you'll probably miss it.

But first, here's history up until 1980:

Note that while credit rose through the 1950s and 60s, so did GDP. And while the first seeds of the bubble game were apparent in in the 1970s, up until 1975 or so there was no manifestation of the sort of bubble economics that created this mess, and indeed we actually had a quarter in 1977 when we increased output as much as we increased debt.

Here's 1980 forward:

Note the incessant bubble economics since 1980. In fact 1980 was the last time (other than during the depths of the collapse in 08 and 09) that we actually put in a single three month period where there was more economic growth than there was new debt creation.

To those who claim that modern fiat monetary systems demand this sort of dynamic, go back to the chart above it. We've been on fiat money since the 1930s, and yet we ran through the 1950s, 1960s, and part of the 1970s with the monetary and credit system in balance. It can be done but doing so requires that your growth be real and a function of production - not bubble finance.

Here's the problem you probably missed in the first chart though - see that red box? We topped out at the end of last year and turned downward. This pattern is the same one that we saw in 2007, but from much higher levels. We're in big trouble folks, right here and now, and this data is always three months behind.

What's worse is the corporate balance sheet picture:

Note that corporate equity value compared against assets has gone back into "bubble" mode and leverage is again expanding.

Indeed, we're above the levels of 2007 and trying to break out from the 09/10 levels. More-importantly we're well beyond double the leverage level that for forty years was a reasonable "lid" on corporate leverage levels.

Claims that corporations have "de-levered" are also a lie, and this puts stock prices at extreme risk, as they are at present predicated on nothing more than the lie that "everything is ok" rather than tangible business valuations.

Finally, we have this from El-Erian:

The facts are striking and worrisome. Private institutions around the world, and even some public ones, have sharply reduced short-term lending to French banks. Credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations. Bank equity now trades at a 50 per cent discount to tangible book value on average. To make things worse, the ratio of market capital to total assets has fallen to 1 – 1.5 per cent (compared with six to eight per cent for healthier banks).

Right. But that equity value discount is not limited to French banks, as El-Erian is talking about. It is in fact even worse here in the United States, where we have major banks trading at one third of alleged "book value."

As I have repeatedly pointed out were these balance sheets accurate anyone with money could make an instant 100% or greater profit by simply buying these companies up. It's not happening, which means that either all of those with capital are individually and collectively stupid or the balance sheets are lies.

JP Morgan is trading this morning at prices seen in 2008 after Lehman's failure. So is Bank of America, Goldman Sachs, Morgan Stanley, Citibank and others. And this morning - now FedEx is as well!

A couple of weeks ago I opined that were you caught "long" equities you'd likely get another opportunity to unload them at reasonable prices before all hell broke loose. It appears that yesterday was that opportunity in the morning, as we're now trading seventy S&P points, or about 6.6%, below where we were yesterday morning. You've once again had your 401k and IRA whacked by the incessant lies and scams promulgated by your government and the "financial wizards" who seduced you back into the markets with half-truths and siren songs.

The market opened this morning down 300+ DOW points and the VIX slammed through the 40 level. There will clearly be bounces along the line but as things stand right now the underlying financial conditions have not changed one iota from where they were in 2007. Instead of allowing those who were overlevered to go bust and have capitalism do what it does best - creative destruction of the foolish - we instead took private effectively-defaulted risk and transferred it to the public balance sheet.

But that's a scam - it simply moves the deck chairs on the economic Titanic, because governments can only raise funds through two means: They can borrow money (increasing leverage) or they can tax it (decreasing consumption or investment by private parties.) The obvious "borrow it" choice was made here in the US and elsewhere, but just as with private borrowing government borrowing has limits and we're now running into them, and deficit spending creates false demand signals in the economy that must eventually end.

Recognition that you've been scammed can be a truly ugly thing. It is usually violent at an emotional and financial level, and more often than one would like it has a habit of being violent in the physical sense as well.

Well, America (and the world), you've been scammed by the financial institutions and governments for the last 30 years. 2008 was the first spasm of recognition but was short-circuited by.... you guessed it.... even more scams. Rather than demand truth and an end to the games the American consumer lapped up the frauds and schemes of the politicians on both sides of the aisle who conspired with the financiers to rip you off once again.

The opportunity to address these issues as I have been tirelessly attempting to do, was ignored by those in policy roles in Washington DC. Those who have been reading The Ticker are well-aware of my efforts going back into 2007 and through the 2008 Presidential campaign on both sides of the aisle, along with my efforts since.

They've been ignored with the political establishment choosing to knob-job the banks and lie to you, the public, rather than address the fact that the entire last 30 years have been one gigantic economic scam and that what they were attempting to do could not, as a matter of mathematics, succeed.

Now recognition of that fact is dawning on people in a convulsive fashion, and markets of all sorts are reacting as one would expect when their entire worldview is exposed as having been a gigantic and intentional pyramid scheme constructed of debt layered upon debt that cannot be paid down. The wrong thing was done in 2008 and there is zero evidence that our government has changed one iota in their singular focus on misdirection and lies in this regard.

Welcome to awareness; I hope you've taken