No Kidding? by Karl Denniger

From Karl Denninger, on a guest post at

No, really?

As I’ve discussed at length, there are many catalysts in play in the market’s turn, from fears about China to corporate earnings and commodity prices. But at the core, much of this plunge is about a loss of faith in cheap money stimulus. It’s as simple as that.

Loss of faith?

The problem isn’t simply that “central banks will rescue us.” It’s that the world economic system has become addicted to a 30 year trend of fiscal irresponsibility that long ago crossed the line into abject fraud, and utterly nobody has gone to prison for it.

Specifically, the “I can afford $10,000 in interest, so how much can I borrow?” paradigm has become embedded not only among business but more importantly among governments of all stripes as well.

When the rate of interest is 10% the answer is $100,000, of course.

The problem is not that you borrowed the money, it’s that you did so for any purpose other than capital investment that has a return greater than the carrying cost and principal over the life of the loan.

That in turn means you never intended to pay the debt off at all, only to roll it over. In other words you didn’t “borrow” at all; you instead took someone’s money and spent it, permanently removing their capital and placing it into the marketplace for the purpose of consumption on the premise that you will forever more be able to continually pay that interest expense.

That’s bad enough. What’s worse is that when the prevailing rate of interest is falling over a three-decade period (as has been the case) whenever the rollover time comes you “borrow” even more because you can do so with the same interest payment, spending that money on non-productive things as well.

So the $100,000 loan, as interest rates fall from 10% to 1% becomes a $1 million loan, and the entire million dollars gets spent into the economy as a whole.

That trend has now ended because there is a hard floor at zero. In the best case rates simply flat-line here at which point you can no longer borrow more money — and the game collapses as so-called “economic growth” also goes to zero.

In the worst case rates rise and you instantly go bankrupt as you can’t afford to rollover.

Incidentally, if I remove this expansion just on a federal level just in the last few years in the United States then GDP “growth” is under 1%, and since the population is expanding at about 1% as well this means that per-capita GDP is actually NEGATIVE and has been for the last several years.

How do you sustain so-called “market price increases” (for stocks among other things) when there is no per-capital GDP expansion and hasn’t been for the last many years — in fact, coming up on a solid decade of said non-performance?

Eventually people wake up to the lies as it flows through to the corporate balance sheet, and at that point you’re done as debt-funded dividends collapse and non-dividend paying stocks are discovered to in fact be worth zero.

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