When insanity starts making unlikely appearances

Originally posted by Karl Denniger on Market-ticker.org:

Jackson CornHoled would be the term for Friday’s sell-off.

For the last couple of months there has been this recurring theme, including in places where insanity usually doesn’t make much of an appearance (like my forum):

The Fed will not keep raising rates, it can’t.

The Fed will not let the {stock | housing | bond} market fall; they will cut rates.

QE will be back in {1 month | 2 months | before the winter}.

Well…… as I pointed out: Wrong.


Because structural inflation is being embedded into the economy and I’ve pointed out why that’s happening as well. Congress has believed for the last couple of decades it can spend without limit and not have it happen; the reason is trade sequestration.  In short all the emitted dollars are rapidly gobbled up overseas and while much of that is transient if the absolute size of foreign trade where this is happening goes up then even if it is transient the amount sequestered rises as well.

Only funds that are available to spend here in the United States, here and now, cause inflation in the United States.  It’s basic: Inflation is simply more available spending power, between previously-earned funds (money) and credit (which looks like money but isn’t) in comparison to the things you spend it on.

Productivity improvement (that is, doing more with lessshould produce a mild deflation.  That is, if I can produce 3% more this year than last with the same inputs because I’m smarter (I learned things and applied them) I should see my standard of living rise 3% because the price of what got produced falls by that amount; all things being equal this too is math and thus always happens. This, by the way, is good for you; if you do more with less, that is you’re more-productive you should have the ability to keep that and thus improve your standard of living in real terms.

It doesn’t happen in the real world because the Congress immediately spends all of that and more buying votes.

They have been “taught” if you will, despite it being a mathematical impossibility, that they can do all of this and not have inflation explode in their face.  You, for your part as Americans, have all bought into the myth that rising prices, so long as they are centered in certain areas, are good when in fact they’re always bad.  If instead you keep your productivity improvement the number of dollars you have would not go up materially but what they buy would increase and thus your standard of living would be much better than it is today.

Well, we cut off trade sequestration essentially all at once when the Russia/Ukraine dust-up started.  By seizing and freezing assets of all sorts we declared that anything that is in International Trade and thus can be seized might be, and you have no way as a businessperson to prevent that.  All you have to do is be on the wrong side of some line or political disagreement at the wrong time and everything you have out in such trade balances is gone.

The US has done this sort of thing on a “onesie-twosie” basis for a long time and nobody got exercised about it.  After all what does Iran produce that we buy, other than oil and by the way, the oil belongs to the nation-state, so the risk to an ordinary merchant was tiny.  This time, however, nearly the entire world went along with it and it was not limited to the asset of a nation-state (Russia, in this instance); it was extended to anyone who was “too close” to the leadership, with that being an entirely-arbitrary line and extending to those people’s and firms personal assets even though they had nothing to do with shooting anyone or bombing anything.

As soon as that started the door slammed instantly and irrevocably on using foreign exchange as a holding for trade, particularly dollars and euros, because now the risk is real, it is general and there is no way to defend against it other than to demand payment in your local currency as a producer and that it be tendered before the product leaves your nation.

We are primarily funded by readers. Please subscribe and donate to support us!

As a result all of the emitted credit by our Congress now immediately comes right back into our economy as inflation.

Exactly as it did, more or less, in the 1970s before such trade sequestration existed in material amount.

And exactly as it has this time, and will this time, and thus the only remedy in the end is for Congress to cut it out and until they do The Fed will raise rates to a level required to neuter the Congressional money spigot.

They have to.

They will.

House and stock prices are going to come down.

Not a little either.

A lot.

Maybe by as much as 2/3rds or more.

Congress has its work cut out for it.  As I’ve also pointed out for more than ten years the only place you can realistically get the funds to drive deficits below the rate of productivity growth, and into surplus for several years to reverse the inflation Congress has caused over the last 20 years through its handouts is by destroying the medical monopolists.  That’s simple math — if you look at the current Treasury Statement you will find that CMS, Medicare and Medicaid, are $1.669 trillion dollars out of $4.83 trillion, or 34.6% of the total spend dwarfing any other category and more than twice the operating deficit run-rate.

If Congress does not do this, and they won’t unless we the people force them to (you need only look at all the ads on TV and social media to see why) there is no way out as at a run rate of more than $700 billion in the hole through July (which is about one trillion a year since there are two more months in the fiscal year) inflation will continue to run well above Fed target and thus The Fed will continue to raise rates until it does not.

And no, this won’t be a “dip” that is recovered in a short period of time either, because the pricing you’ve seen wasn’t driven by innovation and advancement.

It was driven by a deliberate effort within our government on both sides of the aisle to hand out something for nothing in the belief that the trade sequestration would hold forever without consequence, and thus they could do it and get away with it.

It never could work because that which can’t be sustained won’t be; we merely argue over “when”, not “what.”

When is now.

Originally posted by Karl Denniger on Market-ticker.org.


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.