More Smelly Emissions From Omaha
Courtesy of Karl Denninger at The Market Ticker
One would think that Buffett would be a bit more circumspect when his holdings have benefited so wildly from the fraudfest of the last few years:
The “gusher of federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery, Buffett wrote in a New York Times commentary yesterday. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”
The "gusher" has done no such thing.
As I have repeatedly pointed out (including in the Tickers of the last two days) the transmission mechanism in our monetary system – the "moneyness" of debt transmission and sale – remains broken.
It remains broken because we have refused to prosecute and remove those who have committed fraud from the system, we have refused to force honest marks to be taken on these so-called "assets", and we have refused to clear the system of the bad debt.
We have instead "gushered" newly-issued Federal Debt into the system.
This is similar to someone presenting in the emergency room with a severed femoral artery. By continually injecting huge amounts of blood you can prevent circulatory collapse and the death of the patient.
However, your ability to continue this path of "treatment" is limited by your supply of blood. If you do not repair the severed femoral artery before you run out of blood supply the patient will die.
We have done nothing about the severed femoral artery.
The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system. The U.S. budget deficit is forecast to reach a record $1.841 trillion in the year that ends Sept. 30.
There’s the draining of the blood bank. How much longer can we continue to draw on what our policy-makers seem to think is an unending credit supply of accumulated reserves in China and Japan?
This much is certain: There is a finite supply, just as no matter how many pints are in storage in the local hospital, there is a number on that store, and it can and will run dry if it is tapped at a rate that exceeds its replenishment rate.
Officials must still do “whatever it takes” to get the U.S. economy back on its growth momentum, Buffett wrote.
"Whatever it takes" means locking up the fraudsters and eliminating the practice and capacity to lie about asset valuations. Trust in the private credit markets must be restored; this is distinct from allowing these institutions to lie and then backstopping the explosions that would otherwise result.
The former sews shut the femoral artery, the latter is simply injecting another pint of blood.
“Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources,” Buffett said. “With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”
Recovery cannot be gained until the fraud stops. This is axiomatic: while you can continue to pump water out of a leaking boat and it will continue to float so long as the rate of water being pumped out of the bilge exceeds the rate of flooding, the fact remains that until you plug the hole the ship remains in peril and if, for any reason, the bilge pump fails (say, it runs out of gas!) you’re going to sink.
“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt,” Buffett said. “The dollar’s destiny lies with Congress.”
No Warren.
The economy’s destiny lies with law enforcement. Congress has already made unlawful all manner of fraud, and intentionally overstating the value of alleged assets qualifies under the definition of fraud.
We cannot have a durable economic recovery until the credit transmission mechanism returns to normal function. And that, as Warren is fully-aware (along with Bernanke), cannot happen so long as we have firms that are lying about asset valuations.
Buffet’s Berkshire has been the beneficiary of these backstops and in addition many of the businesses that Berkshire are engaged in are massively exposed to these frauds, if not engaged in or complicit in them themselves.
It is time for Buffett to renounce his inner pigman and come clean: Fraud must be flushed from the system, the insolvent institutions must be closed, the bad assets must be cleared from the balance sheets and insoluble debt must be defaulted if we are to have a durable and strong economic recovery.
We tried to avoid recognition of the overhang (and resolving it) in 2000-03. We "succeeded" only in creating a bigger mess, just as we did after 1987, and the impact of each bubble’s "reflation" attempt has come with a greater and greater cost in the intermediate term, yet the impact of each dollar of debt in terms of GDP sponsorship has continued to slip.
The mathematics of credit-based monetary systems make the outcome of an attempted "reflation" without clearing the bad debt from the system inevitable – you can "buy" short-term relief (as we have) but with each "reflation" you get less benefit, less relief, and a greater and greater hangover.
We are now at the point where the literal stability of our financial and political systems are at issue – the formerly-applied "solution paths" no longer lead to positive outcomes to any material degree as we are critically close to the point (if we have not exceeded it!) where a new dollar of debt actually produces negative GDP change.
Once that tipping point is reached collapse is assured as no new debt creation can succeed and in fact you must force dramatic and immediate contraction in outstanding debt in order to stave off a complete collapse of the monetary system involved.
We must not go there, irrespective of the crooning of those who are desperately trying to save themselves on a sinking ship – especially when the crooners were themselves involved in drilling the holes that put the ship in peril in the first place!
