The US economy: the math just doesn’t add up

Karl Denninger points out that the numbers being bandied about by the government and big business, particularly with regard to health care, simply don’t make mathematical sense.

Debt doesn’t matter — right up until it does.

So goes the chestnut.

In actual practice, however, it’s much worse: Increasing debt tends to make equity valuations go up right until it matters, then it makes them crash.

There is exactly zero attention being paid to this.  But the truth of it is found in every recent, and in fact all the nasty historical drawdowns in the market.

. . .

If you look at the actual GDP of the country — that is, what it really produces, you would not count net new borrowing that is unsecured by an asset (that is, for which an asset’s title was not exchanged.)  All government borrowing is unsecured.  It was obvious in the mid to late 1990s that the health care monster would devour sufficient funds that net income could not support the expansion in cost; even then I was seeing >10% annual increases in health insurance expense for our employees, and on a compound basis what was due to happen was obvious.  Ten years later it happened, and from that point forward we have never actually had any economic expansion at all in real terms because government emitted credit, all of it borrowed, has canceled all of said “growth.”

The Federal Government has emitted approximately 7% of economic output per year in new debt since the 2008 crash which is far greater than any economic expansion recorded.  In other words the net-net economic output of the nation has been negative each and every year since that time.

In point of fact this means we are today in a nearly 10 year old economic depression that we are papering over — and have been continually since the 2008 crash.  We are doing it via the same mechanism we did it the last time — through emitting unbacked credit just as was done with liar loans in the housing market and bogus sales of worthless stock certificates in the 1990s.  It’s just much larger and done by the government, aimed at a different sector.

The problem isn’t the cost of insurance.  It’s the cost of health care, which continues to go up at double-digit annual rates and that must not just stop it must be collapsed by a factor of 80% or it will destroy the economy, our markets and our way of life.

Again this has already forced the federal government into borrowing enough to literally cancel all economic growth since 2008; we have not printed an actual positive figure adjusted for said borrowing since the crash!


There’s more at the link.

Mr. Denninger writes in the context of health care, and foresees a future in which it will simply be unavailable at any price to many Americans.  I can’t fault his logic or his mathematics.  He’s right, too, in that politicians are “papering over the cracks” rather than tackle the real, meaningful, systemic reform that will be necessary to fix the problem.  They daren’t, because if they did so, it would mean an immediate and very serious economic recession while the problem sorted itself out.  They know they’d be held accountable for that by the voters – so they keep on kicking the can down the road, trying to ensure their own re-election for now, and hoping that it won’t explode like a depth-charge under the economy until they’re safely retired.

Of course, the economic problems go much deeper than health care alone.  David Stockman, whom we’ve met in these pages many times before, has just forecast a 40% to 70% decline in stock prices, although he blames that on the Federal Reserve’s monetary policies rather than debt.  In reality, of course, they’re the same thing.  The Fed’s monetary policy is what’s allowed the government to carry on issuing debt, in particular because the Fed bought billions of dollars in Treasury securities (thereby financing the debt) when no-one else would.

My urgent recommendations to prepare for emergencies aren’t just for natural disasters.  If the economy goes to hell in a handbasket, such preparations can help all of us cope with the fallout.  If you find yourself suddenly unemployed or under-employed, or your wages or salary reduced, you can always live off your stored supplies for a while, if necessary;  and if you can’t afford gas for your car this week, it’s awful useful to have a couple of cans of gasoline stashed away, just in case.



  1. Why do stock prices keep going up, in the face of all reason? Individual retirement funds. Millions of people have part of their paycheck taken out and invested every two weeks. This money must be invested according to the plan they signed up for – which is mostly stocks, with some bonds. The money has to be spent.

    How many new businesses show up on the market every two weeks? Not that many? (Why new businesses aren't being started is a different topic, but highly relevant. What economic recovery?) So then, more money chasing a relatively stable number of stocks MUST drive the price of those stocks up. The selling brokers need to make gains for their accounts, and the buying brokers have to buy something, so they chase after the hot stock of the moment. Why is it hot? Because so many brokers / so much money is chasing after it. (Like all humans, brokers are herd/pack animals.)

    This process is supremely rational at the micro level, even if it seems irrational at the macro level. The stock market will continue to go up, with occasional corrections, as long as more money keeps flowing into it. It's just a simple case of supply and demand.

  2. Regarding health care – That which can not continue indefinitely, must eventually stop. The predicted stop date is between 2032 and 2034. By that time, social security expenses will occupy 100% of the federal budget. Medicare/aid expenses will occupy 100% of the federal budget. Debt payments will occupy 100% of the federal budget.

    That's a lot of 100 percents there.

    Health care expenses are driven by various factors – the relative paucity of trained doctors, ridiculous regulations (did you know that medicare forced over half of all hospitals in America to close?), ridiculous lawsuit, and the corrupt death spiral of the insurance industry.

    I'm not an opponent of insurance. I think it's pure, free market capitalism. What I'm upset about is the rampant corruption that the health insurance industry, and this most definitely includes medicare/aid, forces on the health providers. Over half of all medical spending is simply insurance processing/compliance. Prices are artificially inflated (massively, in some cases) so that insurance companies (remember, this includes the government) can show that they negotiated huge price concessions.

    Large hospitals, pharma companies, etc. can afford the kickbacks and bribery to play the game and win. The traditional neighborhood practice can not – that's why so many of them have closed. Doctors don't have individual practices now – they've organised to share administrative expenses. There is a reason why you can't get an estimate of how much a procedure will cost – the doctors simply don't know, because so much billing is tied up in red tape corruption. They doctors don't generally like this, but it is how the game is played, if they want to survive.

    This is one of the reasons that America isn't training more doctors now than we were in the 1960's. Another is the AMA, which like all unions wants to keep the supply of skilled labor low so that wages can be kept high. Did you know that the US has added exactly one new medical school in the last 50 years?

    With all the expenses that doctors have, which includes student loans, general practitioners simply don't make enough money. Most of them would be better off as plumbers. "Rich doctor" is a myth these days, unless you're an in-demand specialist or practicing in Beverly Hills.

    So many problems, no simple solutions. Everything goes to hell in a hand basket within the next 15 years or so, and we can not count on the current quality of politicians to do a single blessed thing about it until it is far too late to make any positive difference. We can assuredly count on our "friends" on the left to make everything worse, though.

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