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No, The Economy Will NOT Be OK
Karl Denninger 

No, this is not transitory.

And since we're headed for political season let me remind you of the sordid tale that led us here.

We elected Donald Trump as President.

Donald Trump deliberately, from his first day, pushed "easy money" policies that were in fact how he levered his real estate empire to "success."  Easy money policies are a scam, but a very easy to run scam that appears to be "great" for a while.  The reason is simple.

Take a "model economy" with, for example, GDP of $100,000.  Presume 10% of the GDP is out in debt ($10,000) and further presume that the rate of interest, on average, is 2%.  At the same time presume the nominal (that is, "in dollars") growth rate of GDP is 3%.

This looks "safe", right?  

Well, it is if the amount of debt remains the same.  But it won't because the rate of interest is less than the growth rate, that is, you're paying people to borrow into existence credit that has nothing behind it "on the come" that the economy will expand, and they will do exactly that.

If the amount of debt expands at 4% while the economy expands at 3% no matter the rate of interest above zero interest expense will eventually consume all economic output.  Since nobody can ever consume more than 100% of anything this means that all such attempts, unless abandoned and reversed lead to economic disaster.  This is not a matter of policy or debate it is mathematical fact and cannot be changed any more than 2 + 2 can made equal to anything other than 4.

Now there is an argument for this sort of policy during recessions; in fact this was Keynes' argument for attempting to level economic conditions: You spend in excess (that is, in deficit) during recessions, and you tax in excess during good times.  This retards the economy during good times and boosts it during bad.  The problem: During good times nobody will do the necessary thing to balance the system; Keynes was a fool in that he believed in that which was impossible, which is to expect politicians to voluntarily screw themselves out of a job.

Trump knew all of this and that borrowing at below the rate of economic expansion, whatever it is, screws someone.  He knew it because he nearly blew his nascent empire up early in his career getting levered up into the maw of a recession, which came within an inch of destroying him economically.  He was bailed out, which informed his future actions decades later when he had the power to bail himself and his political friends out as President.

It is a fact that Trump ran record deficits during an economic expansion and he did it on purpose with the full consent and in fact authorship of Congress.  That's because under our Constitution Congress must do that in that all spending bills must originate in the US House.

That is, it's not Bidenflation to start -- it was Trumpflation.  Biden and the Democrats, emboldened with what Trump got away with and the public clamor for more, piled it on even deeper once he got into office.  But this time, as with all other times, it takes time for that to filter through to prices.  Nixon created the conditions under which Ford and then Carter (and all of us) suffered; it was Nixon's wage and price controls, along with his (according to historians) literal assault on Burns, the chair of The Fed at the time, that led to ruinous stagflation under Ford and Carter's Presidency.

Likewise it was the profligacy of the 1920s that led to the crash in 1929.

But what people forget, because its inconvenient, is that while "boom and bust" is part and parcel of any political system where one can deficit spend, simply because nobody gets elected by promising to raise your taxes and cut spending if they actually mean it and do it during boom times, it is the reaction to those busts that creates economic monsters -- like the 1930s and what we are facing today.

How about 1920/21?  Why isn't this prominently mentioned?  It should be -- in terms of the size of economic contraction that occurred it was massive.  But -- this came shortly after The Fed was founded and The Fed and Treasury refused to step in, lower rates and run deficits.  Herbert Hoover, then Secretary of Commerce, strongly urged both to do exactly that.  They refused and the result was a sharp, deflationary depression.

That's bad, right?

No, it was good!  It was very good except to those who were wildly over-levered.  Coming out of the 20/21 depression the United States recorded the highest GNP growth rate ever in our history.  Employment was back to full within twelve months, marking the fastest employment recovery and gain ever in the history of the United States.  The elements of production that were bought with effusive credit that defaulted were snapped up for pennies on the dollar and those who did so became fabulously wealthy and employed others, leading to an enormous lift to virtually everyone across the United States, from the richest to the poorest.

We called this "The Roaring 20s."

As with all exuberance it went too far.  1929 happened, and of course we know what followed.  That time, as President, Herbert Hoover got his demand for easier credit and deficit spending in size.

The result was a decade of misery instead of a year of sharp contraction followed by a booming recovery.

Trump created a monster born of his own ego, as I've pointed out repeatedly: He ran huge deficits during good economic times, an act much worse than what Hoover tried to do, for Hoover at least had the argument that the economy was in the tank.  Trump had no such excuse; he simply thought he could do it and get away with it, branding himself as having "Made America Great Again."  Do recall that one of his pillars was Rule of Law and yet that was a lie.

One of the promises Trump made during the 2016 campaign was to de-fang the medical monopolies.  That promise disappeared literally on the night of the election in 2016; I watched it happen in real time when the bullet points -- three of them -- disappeared off his campaign web page within minutes of the election being called for him, never to be seen again.

One of the key problems we've had for decades is lack of The Rule of Law.  Price-fixing and monopolies are illegal in the United States, and not just civilly (that is, fines) either.  They're 10 year federal prison sentence felonies yet virtually every single medical practice engages in them, from the local doctor's office to the hospitals, along with the health insurers.  They do not have an exemption; that was run to the Supreme Court twice in the 1970s and 80s and turned away both times but nobody ever gets prosecuted for any of it.  Trump promised repeatedly to end all such selective prosecution but did not -- deliberately so.  As just one of many other examples E-Verify exists so employers can prove they got work credentials that are valid because Treasury knows if the SSN you give someone is both valid and yours, or if the person to whom it was issued is either dead or you stole it and its being used six other times at once in various places all over the United States.  It is within the power of the Executive, under the Immigration and Naturalization Act and Treasury's power to compel honest reporting for tax purposes, to mandate that employers to use E-Verify and prove it by insisting on the inclusion of the control number for each employee they have on each 941 return every business that has even ONE employee is required to file.  Said compulsion already exists in a few places but extending same to all employers would do far more than "building a wall" because without a means of employment those who come here illegally would have no way to survive other than to engage in rank lawlessness.  Then go after any employer that falsifies or fails to include people on their 941s (this is already illegal) and throw them in prison.  Problem solved.

Trump refused to do that and he could have done it within 90 days of taking office.  Publish the rule, take the notice and comment period of three months, done.  Why didn't he?  Because its always cheaper to hire someone who is under your thumb in that if you call INS/DHS they get deported, never mind not paying employment taxes.  That's cheating and it is illegal -- criminally so.  Its criminally illegal and wrong not just because of the taxes evaded but also because it is an abuse of human rights, something people on both the left and right "claim" to support.  They do not; witness how we're perfectly happy to allow China to use effectively-literal slave labor out of the Uyghurs while at the same time talking about "reparations" to people who never were slaves nor is anyone in this nation of African descent who is alive or who personally knew an ancestor who was.

For those of you who think DeSantis is somehow a savior may I remind you that he personally issued an Executive Order, egged on the Legislature to codify said order in statute and then signed same into law in Florida that made "vax passports" a civil offense punishable by a $5,000 fine for each person from which one was demanded as a condition of providing goods or services within the boundaries of the state.  This wasn't passed over his veto in the Florida House and Senate -- it was passed at his urging after he issued a similar edict as an EO and he signed said legislation.  It is impossible to overstate the support DeSantis had for this law in that he originated the action as Governor!

So where were the ruinous fines leveled against the cruise lines, among others, which all implemented same on land in Florida and still do to this day, and thus as businesses operating in Florida were subject to said law?

It never happened.

Nor did any of the firms and organizations on this list get hammered, reported in October of last year.  To the best of my knowledge the number of dollars collected in said fines is zero and in fact zero such citations and prosecutions have issued.  The number of persons abused by these policies which are illegal under Florida State law numbers in the thousands per cruise ship sailing out of Florida ports alone.  By now this likely numbers in the hundreds of thousands of people, and thus it is likely over a BILLION in said fines that have gone unassessed and uncollected.

I remind you that this was not simply an "Executive Order" it is a Statute in the State of Florida, enacted by the legislature through regular order by the Representatives and Senators placed into office by the people of the state and signed into law by the very man who is in charge of law enforcement, as head of the Executive.

To the best of my knowledge there has been more enforcement of our border laws by Biden than there has been of this law by its champion and the Governor who demanded it be passed!

We can have a healthy debate over whether the law was good or bad, but what you can't argue is that a man who thinks the Statute Books of the state over which he presides are pure political tools to be scribbled on to score political points rather than enact policy that is evenly enforced within a jurisdiction has any right to sit in any place where said person has any power whatsoever.

DeSantis is no different than Joe Biden and his so-called "Border Security" man Mayorkas.  In fact DeSantis is worse by far in that Mayorkas actually supports nearly-unbridled immigration where DeSantis not only supported the law against vax passports he initiated it via Executive Action and then demanded it be confirmed and codified as law in the Legislature -- only to completely ignore his own law the moment it was no longer a political talking point with which to beat Biden over the head.  Not only that but he has screwed his own State out of a billion dollars in fines had the firms continued rather than pay the original levies for the first violations and stop.  Incidentally since that illegal behavior has continued it would certainly appear the fines are in fact due in full.

It is precisely this refusal to enforce the Rule of Law stretching back decades that has put us into our present economic condition.  We now have a severely-damaged economy and workforce, we may have a critically-damaged state of personal health in our nation (never mind worldwide) that arguably occurred due to the direct malfeasance and intentional violation of laws in the first instance, that first instance was likely responsible for the emergence of a pathogen into the population as a whole and yet even after all that when the people of a given jurisdiction pass a law or regulation through the proper representative process and it is signed into law it is then immediately ignored by the very person who championed it through and now who, it is reported, wants to be on the Presidential ticket in 2024.

If I'm right about where this is headed, and I'm increasingly convinced by the data that I am, the destruction in the workforce, personal health and economic reality and thus both asset prices and supply chains will all come into increasingly-sharp focus over the next five to ten years.  We're not on the back side of this, in short -- we're on the very front edge, and we have a looooong way to go.

America wasn't killed by some outside entity folks -- we are in the process of committing national suicide as a body politic, and it is the direct refusal to hold those to account for the most-egregious such violations of not only law but human decency that are responsible.

Thus no, the economy will not do just fine -- and the above, at its core, is why.  At best the government and its various entities will attempt to manufacture yet another scam, but given the damage the previous and current ones have inflicted, the odds of success, even for a relatively short period of time, are not good.


Mr. Denninger, recent author of the book Leverage: How Cheap Money Will Destroy the World, is the former CEO of MCSNet, a regional Chicago area networking and Internet company that operated from 1987 to 1998. MCSNet was proud to offer several "firsts" in the Internet Service space, including integral customer-specified spam filtering for all customers and the first virtual web server available to the general public. Mr. Denninger's other accomplishments include the design and construction of regional and national IP-based networks and development of electronic conferencing software reaching back to the 1980s.

He has been a full-time trader since 1998, author of The Market Ticker, a daily market commentary, and operator of TickerForum, an online trading community, both since 2007.

Mr. Denninger received the 2008 Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the 2008 market meltdown.

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