Karl Denninger was the founder and CEO of MCSNet. He later sold the company to Winstar Communications. Denninger is a founding contributor to the finance blog market-ticker.org, and has used the internet to bring attention to his concerns with the financial system. Denninger was also one of the early members of the Tea Party movement, sometimes referred to as a founder.
Denninger is gifted at processing mountains of statistical data and being able to present his findings in an understandable manner. He does not pretend. Denninger does not ignore data he does not like.
Denninger did an outstanding job with COVID data. While I do not always subscribe to his ideas for fixing things, his analyses are thought provoking.
Karl Denninger believes we are headed to very bad economic times and he pulls no punches in telling everyone why.
Two decades ago we had a choice to make in 2001 and chose poorly. In 2008 we chose more-poorly bailing out banks and failing to imprison and ruin those who defrauded investors of all stripes, including individuals who lied on mortgage applications, a violation of federal law.
2008 should have been a big warning to people of all political stripes. However, the Fed under Bernanke managed to “paper” over the problems. Pelosi, then speaker of the House, anticipated the Democrats winning in 2008. Pelosi wanted the ability to hand a blank check to the incoming Democratic President.
Pelosi abandoned the appropriations process entirely. John Spratt (D-SC), chair of the Appropriations Committee, acquiesced and the rest is history. The government has been funded by continuing resolutions (CR) since then.
This was one of the big items on the agenda of those who held up the election of Kevin McCarthy. McCarthy promised that the regular order of appropriations would be followed. That did not happen and McCarthy is gone.
To say that the government has been spending like a drunken sailor does a disservice to drunken sailors. Spending has careened out of control. This was true under Obama and Trump. It is even worse under Biden.
Denninger goes on:
The current operating deficit in the Federal Budget is approximately one dollar in three. The final 2023 MTS is not yet out, but it will be soon and will show an operating deficit of more than $2 trillion. All of that is contained within CMS; that is, Medicare and Medicaid, which has spent more than that and of it only Medicare tax receipts offset the spending.
…Through August the deficit was up 11% from last fiscal year, totaling $1.524 trillion. September is always an extremely heavy month; last fiscal year the deficit in that month was $429 billion alone. There is no reason to believe this September, just past, will be any different.
…Medicare and Medicaid have spent through August $1.918 trillion yet have received only about $330 billion in offsetting taxes, or about 17% of what is spent. The entire problem lies here; that is the entire budget deficit thus far and it is actually worse than the figures show because part of Medicaid spending is in the States and thus not reflected in the federal MTS.
This problem has existed for a long time. And Obamacare made it worse. That’s right, worse. Yes, I know that Obama said that medical costs would go down. That was just malarkey to pull the wool over the public’s eyes.
America spends more money on medical care than other countries and has worse results to show for it. Big Pharma owns the government and the media. Big Pharma spends oodles of advertising money pushing drugs. The CDC and FDA are subsidiaries under the control of Big Pharma.
COVID and the vaccines are a prime recent example of this control. Information about cheap, effective drugs was suppressed and, in fact, doctors who tried to be doctors and prescribe such drugs were ostracized and even lost their license to practice medicine.
The “vaccines” are an even worse story. The government had to change the definition of vaccines because the jabs did not stop infection or transmission. In fact, it can truly be said that the “cure” is worse than the disease. The jabs produced by Big Pharma have turned out to be a death and disability lottery.
The next item on Denninger’s list is the debt.
This fiscal year — thus far — interest expense alone has been $807 billion, up from $677 billion or 19% higher. This does not include the last month, of course.
That latter figure is going to continue to move higher as existing debt rolls over. Leaving aside the intergovernmental holdings (paying someone with the same $20 in one pocket to another is a net zero) there is $26 trillion outstanding. At an approximately 4% coupon that is over a trillion a year in direct interest expense or half the budget deficit all on its own.
Let’s keep in mind that the national debt was $8 trillion including intergovernmental holdings when Obama took office. This shows just how out of control federal spending has been over the last 14+ years.
The bill on this debt is coming due. The chart below shows the yield on three-month US Treasuries.
The blue line is the yield for the Treasuries. The red is the federal funds rate. Notice anything? The Fed is following the yield curve not leading it. Congress would like people to think otherwise. That way they have someone to blame for high interest rates. These rates are a direct result of the amount of deficit spending going on.
Jerome Powell will not publicly tell Congress to either cut the deficit spending or the market is going to take away the rate question from The Fed entirely. It is an useful illusion that the Fed controls the rates.
Denninger continues:
With a current US GDP of $23 trillion and a $2 trillion deficit the implied rate of inflation is 8.7% across the entire economy. A person would be crazy to lend you money at a negative real rate of return thus it would be reasonable to expect that a one year bond would cost you at least 10% interest in that environment. Today’s short-term rates are half that, and if the escalation continues the lag effect (as you can see the rate is behind the inflationary spending!) will shortly turn into a vertical rate ramp and make paying both interest and the desired programs of the government impossible.
Thus, this must stop and it must stop now because once that ramp occurs services stop whether you like it or not. Yes, the government can “run out of money” on an effective basis even if technically that is not true.
… If the Congress does not stop deficit spending the bids will continue to fall and rates continue to rise. At some point all confidence that Congress will ever get this under control will be lost and when that occurs the rate will go from today’s ~5% to 10%+ or even more all at once.
“That can’t happen?” Oh really? The one year Treasury went from ~5% to over 15% in the space of three years — straight up! Don’t tell me it can’t because it has in the reasonably-recent past, and it most-certainly can again.
This is what the Freedom Caucus in the House is so concerned about. House Reps like Ralph Norman (R-SC) understand the danger involved. This is part of the reason why 90 Republicans voted against the recent CR that extended government operations.
The purpose of a Congress and specifically the House is to determine what to fund and with what to fund it. If you can’t fund it now, you can’t have it, period, end of conversation. Productivity increases belong to the people as a whole, not to a few mavens in Congress who manage to amass tens of millions of dollars over a career while making $170,000 salaries. It is clear that they are gaming it and stealing the money, whether in the stock market or otherwise.
We all need to be outraged over where this is heading. Rep. Ralph Norman is leading the way.
- Where’s the outrage over our $33 trillion national debt?
- Where’s the outrage over our $2 trillion deficit this year alone?
- Where’s the outrage over the countless hundreds of billions of dollars we waste on worthless projects every year?
- Where’s the outrage that interest alone on our national debt will soon eclipse our entire defense budget?
Outrage can lead to changes but they must happen in the short timeframe rather than the longer timeframe. No one can predict when there might be a vertical up ramp in interest rates. But, if it does, half the federal government expenditures will be debt service. That means that major programs will be decimated in their funding from Medicare to national defense. This could lead to a breakdown in civil society.
How do we get there and get there quickly?
Denninger provides a blueprint.
To restore balance we must do the following and we must do it now, not “promise” to do it after the next election (which they never do) or worse, project it over 10 years, which has been repeatedly done and is an even-worse joke.
- All medical monopolies must be broken up here and now. The easy way under existing law is to make clear that any further disparate pricing will be instantly prosecuted with no exceptions, and that every entity shall post a price and charge everyone the same price, just like the corner grocery store. The choice must be made clear: Do it or go to prison; there will be no discussion and no exceptions. The law is already there, has been adjusted at the Supreme Court to apply and this has to be the beginning and end of it right here, right now, today and forevermore forward. Yes, this will be extremely disruptive but it has to be done anyway.
- All illegal aliens must leave and the border must be secured. This means physical barriers and deputizing the citizens who live along it along with the use of the State Guard and yes, if necessary Federal troops. No exceptions, no ifs, ands, buts or maybes. You can bleat all you want about this but the fact is these people are net government sinks, not sources of funds, and we must cut all of that off. To those who say “well they had children while here” they had better take them with them, eh, lest they have abandoned their kids which would be a criminal act. No, being a parent of someone you gave birth to does not give you license to stay. Sorry folks but this is math, not feelings, and math admits no exceptions, ever. In addition we must make clear that if Mexico and China do not close off the fentanyl and meth supply we will slam a trade embargo on them with compensatory tariffs for each and every person who ODs whether they die or not at an outrageously punitive rate per-person. My former residence, Okaloosa County in FL had its budget wrecked one year by just two meth heads that wound up in county jail and then the closest hospital screwed the county blind treating them. Rather than jail the hospital administrators for exploiting that event (if you tried to screw the county like that you would have been indicted) the county turned around and raised property taxes. The next 10 years are going to be bad enough without our so-called “friends” exploiting it further through intentionally poisoning addicted citizens and our medical “providers” exploiting the back end of those poisonings to steal from every other citizen in the community.
- The entire “green energy” scheme has to be shut down today; thermodynamics is not a set of suggestions and false claims in that regard are felony criminal frauds. Either something works on a purely-economic basis without subsidies, cost-shifting, buying “credits” or whatever or it does not. Behind every unit of GDP is a unit of energy and we must stop denying mathematics and physics. If we want to get through this in one piece we need to incentivize energy production right here at home and this means carbon-based fuels and nuclear, both in size and with no BS-by-lawsuit filed by those who wish to scream about some endangered frog. The schemes for EVs, wind and solar must end right now.
The second will help support the wage base (that is, the price of labor) through what is going to be a brutal repricing of all assets. Yes, stocks, real estate, all of it. Expect at least 50% reductions across the board and in many cases it will be 60% or even 70 to 80%. To those who say “nobody will survive that financially” yes some will, but many more will go bankrupt. Bankruptcy is deflationary (drive down price) as it makes the credit formerly emitted go “poof” which reduces the money supply since credit and money are fungible.
We must unwind the student loan stupidity entirely and immediately. Congress must force it back out into the private markets and restore such borrowing as ordinary consumer debt, subject to bankruptcy. If Congress wishes to add a “put” feature on it back at the university in question that works for me and I support that idea entirely because colleges and other entities in the educational space lie all the time about the prospects and earnings return of their degree programs. FAFSA must be abolished in its entirety; once a person reaches 18 years of age they are legally an adult and no entity has a right to demand information — or an “expected extortionary extraction” they call a “contribution” — from anyone else. The existing FAFSA system is best characterized as Racketeering and it must end immediately.
We must act now. We need to bombard Washington with text messages, emails, letters, whatever about the need to get our fiscal house in order. We need to support people like Matt Gaetz, Ralph Norman and others who are trying to steer the ship of state in that direction.
If we do not act now, we run the real risk of our economy collapsing. And that will be chaos. Citizens are not happy now about illegals being put up in hotels and being fed when they are having trouble feeding their own families. Democratic mayors are crying now about the amounts of money going into the illegals problem.
If you think the crime problem is bad now with all these illegal immigrants and street people, multiply that by about ten and you might be close to reality if we don’t take that step of reigning in spending.
Denninger notes:
We can either do it now with some measure of control or the spike in rates will happen and suddenly half the hospitals in the nation will not be able to operate because Medicare and Medicaid funding will not exist and nobody is going to work without being paid.
This is the future that awaits us if we do not get our fiscal house in order.