Karl Denninger’s reaction to Dennis Kneale’s attack on bloggers would have made Bruce Banner proud. Kneale’s snarky comments were aimed largely at ZeroHedge, but Denninger seized on them as an opportunity to highlight just how flawed the Kneale/Kudlow perma-bull argument is. And he did a damn fine job.
Karl’s response was classic Market Ticker. He picks apart Kneale’s argument piece-by-piece, demonstrating superior knowledge and experience. And he offers to debate any time, in the unlikely event that Dennis’ producers take him up on the offer.
But as usual, Mr. Denninger pulled no punches. He titled his post, “To Dennis Kneale: You’re An Idiot“. This likely turned off some readers to the meat of the article. That’s a shame, because it’s one of the best summaries I’ve seen on why the Kudlow/Goldilocks/Green-Shoots argument is flawed. First, he addresses misconceptions about savings rates:
The consumer is 70% of our economy, give or take a few points. The consumer’s “savings rate” (which government blithely declares as income minus spending), which was in fact negative (that is, consumers were spending more than they made through taking on more and more debt), but is now solidly positive at 6.9%.
The impact of this (6.9% X 70%) is an immediate 4.83 decrease in real GDP. Fudge the numbers all you want (and government will), but this is the math, and the math is never, ever wrong.
Consumers are not saving, they are paying down debt in a furious attempt to avoid defaulting on nearly $1 trillion in outstanding credit card balances that have gone from 11% interest to 29.6% along with OptionARMs that are experiencing a tripling of payments while the home’s value is underwater and precludes refinance, all while consumers are being laid off by the hundreds of thousands monthly.
Karl: 1, Goldilocks: 0. He goes on, discussing comparisons to Japan and overall flaws in the Keynesian/Inflationist case:
Japan tried what we’re doing in the 1990s and failed. The Nikkei never recovered its former highs, in fact, it never even got close. Japan’s economy never managed to get materially out of deflation and is now back in it as a direct consequence of their refusal to force the bad debt into the open and default it.
We are going to suffer the precise same fate for the precise same reason unless our government and economic leaders stop hiding the bad paper and force it out into the open where it will default and be removed from the economy.
Your network has fawned all over Bernanke when in fact he is acting exactly backward compared to what must be done – he is hiding bad assets on his balance sheet, allowing banks to hide bad assets on theirs, and refusing to expose the liars, cheats and frauds (along with their phony “assets”) so they will default and clear the system of bad debt. He is doing this because he is protecting those who wrote all that bad paper, mathematics be damned, and if it doesn’t stop we will at best play Japan and at worst have a Depression far worse than the 1930s, as our systemic leverage ratios still, to this day, are higher than they ever were in the Great Depression!
Well done, Mr. Denninger. If you don’t already read The Market Ticker, check it out. The only thing I would add is that Japan’s crises occured during a sustained period growth period worldwide. Our problems are coinciding with what looks like a sustained worldwide r/depression. So they’ll be worse, and result in a completely different outcome than the deflation experienced by Japan. Not to mention the drastic differences in demographics and economies, which Jesse points out in an insightful post.
