Denninger: AIG & The Potential End of America's Government
17 Sept 08 2330 edt:
Watch the video above, and then read what follows, from Karl Denninger:
Watch that video.
Watch it twice, three times if you have to. Go look at the other video, and the other Ticker referenced in there.
Now understand that there is no solution to this fast and vicious destruction of America's financial markets and financial companies until and unless the lying stops.
It has NOT stopped and in fact has gotten materially worse.
Folks, this meltdown will not stop until either:
* ALL financials mark everything to the market, ALL OTC derivatives are traded on an exchange or declared void, and ALL balance sheets are transparent so we can determine who is broke and who is not.
* The market has completely imploded with every financial stock worth zero as the hedge funds and others short each in turn into the ground, forcing each to be bailed out in turn.
Those are the ONLY TWO CHOICES.
Nothing else HAS WORKED and nothing else WILL WORK. With each bailout you simply give people another target and a new way to kill the next company in line. This process will proceed from firm to firm until NONE ARE LEFT and credit availability in the economy is ZERO.
The Fed has expended more than half of their balance sheet, in excess of four hundred billion dollars. It has not stopped the cascade.
The Government has spent nearly a trillion dollars we do not have in bailouts and other miscellaneous nonsense. It has not stopped the cascade.
Indeed, all that has happened is that the velocity of the crash has accelerated dramatically.
There is NO WAY to fix this through adding "more liquidity" - the problem IS AND HAS BEEN THE LIQUIDITY in that this allows BANKRUPT companies to continue to operate and LIE instead of forcing them into the open where they can be liquidated under Chapter 11.
We are here precisely because of the intentional provision of far TOO MUCH liquidity by Alan Greenspan and now by Ben Bernanke.
You cannot solve someone's drinking problem by giving them another bottle of whiskey!
THE LIQUIDITY SWAMP MUST BE DRAINED.
We cannot have a "financial system" that is based on fraud and theft. We cannot have "financial institutions" that claim to be solvent when they in fact are not unless they are able to make up values that are much higher than the REAL value for their so-called "assets".
Wayne Angell was on "Fast Money" tonight claiming that the balance sheet of The Fed is "infinite" and that "they can't be downgraded."
Wayne, you need to be charged with treason for spewing that crap on national television.
Sure, "in theory" The Fed's balance sheet is infinite - they can coordinate with Treasury to print as much money as they want.
So was Weimar Germany's.
The word for what Wayne was promoting on Fast Money this evening is HYPERINFLATION where you find that a wheelbarrow is worth more than all the $100 bills you can stuff into it.
Does anyone remember how hyperinflation worked out for them? I seem to remember a gentlemen with the first name of "Adolf" that the world got out of that little exercise of an "infinite balance sheet."
Why does this path inevitably lead to political failure? Because as soon as lenders discern that this is occurring they shut off credit entirely.
Think about it - you have $1,000 to lend out. You detect that the government is printing and intentionally devaluing your money. If you lend it out at 10% interest but the government is hyperinflating at 100% a year, you lose about half of the money's value every year! So if you lend me that $1,000 when I pay you back you can only buy half as much as you could before! For obvious reasons you're not going to allow that - you will instead immediately spend your $1,000 on something of physical value such as land before it can be debased.
Hyperinflation kills all credit availability instantly for this reason and any credit-based economy immediately implodes. This results in enormous and immediate mass unemployment and a resulting rupture of the social and political fabric of a nation.
As for not being able to be downgraded, you obviously didn't hear S&P today, which stated quite clearly that the United States "AAA" credit rating is not a right and must be earned. Can't be downgraded eh? Oh yes The Fed can be - along with everything else.
Folks, we require over $2 billion a day in foreign investment in order to pay our bills.
This is what came out from China today:
"BEIJING, Sept 17 (Reuters) - Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.
"The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision," writes the commentator, Shi Jianxun.
"The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."
"Infinite Balance Sheet" eh? See what foreign governments think of that sort of garbage?
Please understand - if foreign governments withdraw their support of our government funding via either scaling back their Treasury purchases or outright refusal to buy (or worse, they dump them on the market into this "fear spike" we're seeing now), we are absolutely and instantaneously screwed.
Michael Bloomberg, one of the few intelligent commentators out there (and a billionaire by his own hand) said exactly the same thing today:
"WASHINGTON (AP) — New York Mayor Michael Bloomberg is warning a 'next wave' of financial pain may come when foreign entities stop buying U.S. debt.
The billionaire mayor is speaking to an audience at Georgetown University, telling them it's not clear who is going to continue buying U.S. debt as financial firms try to cope with a crisis of confidence on Wall Street."
Mr. Bloomberg sees the same thing I do, but he's a bit more polite than I am about it.
Then there was Standard and Poor's, which made this quite clear as well:
"The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve "has weakened the fiscal profile of the United States," S&P's John Chambers told Reuters in an interview.
"Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating," Chambers said. "There's no God-given gift of a AAA rating, and the U.S. has to earn it like everyone else."
Is that clear enough?
Congress MUST ACT RIGHT DAMN NOW.
Congress MUST stop The Fed and Treasury from printing any more money. The institutions that are insolvent must be forced into the open and put through bankruptcy.
We CANNOT wait until the next Congress and the election to stop this nonsense; that's five months in the future. By then the United States could easily be quite literally broke and forced into a hyperinflationary spiral!
Debt that cannot be paid must be defaulted.
Yes, this is painful.
Yes, it will hurt.
But as you can see it is already hurting plenty; the "alternative" isn't working and CAN'T WORK, as I've been pointing out for over a year!
We CANNOT get a true value on the market until this occurs.
It is NOT POSSIBLE.
In the BEST CASE if we do not act NOW, take your salary and assets and cut them by 30%. Everything else - cost of food, gas, electricity, etc - remains the same.
Worst case? Divide your salary and assets by three, but again, your costs remain the same.
If you are in the lower income echelon, you will go broke and become homeless.
If you are middle class, you will be living in a tenement or trailer. If you're lucky. If you currently own a home, you won't any more.
If you are upper-middle class, you will fall to lower-middle class, and all your luxuries will disappear. No more Lexus or nice vacations.
If you are "well off", you will be living in a modest home, what we now call "middle class", and some of you will go broke outright, because your "well off" status has been achieved with leverage - which will blow up in your face.
If you find this unacceptable you must act TODAY to stop the government from proceeding down the path we are on.
Your choices are:
1. DO NOTHING and your employer and you will lose access to credit. As he or she does, you will lose your job and ultimately everything you own.
2. GET ACTIVE RIGHT NOW - on the phone with Congress, Treasury, The President and the Candidates. Take to the streets. Organize a general strike with your friends and neighbors, and buy nothing for a day or even a week. Make clear to your representatives that you INSIST that they stop this fraud and nonsense, forcing all of the fraudsters and phony balance sheets and lies into the open, along with removing all of the regulators who intentionally turned a blind eye to this mess, including but not limited to Geithner, Bernanke and Paulson.
If you do nothing, you will get #1, or worse, The Government will continue to face bailout after bailout until the printing reaches a point that foreign governments say "no mas" - at which point our government's ability to fund itself - and our current way of life and representative government ends.
As of the time of this post (2333 edt), here are the Asian markets (final column is percentage decline from yesterday's close):
Australia: S&P/ASX 4553.20 -169.00 -3.58
China: DJ Shanghai 196.35 -11.52 -5.54
Hong Kong: Hang Seng 16971.31 -665.88 -3.78
Japan: Nikkei Average 11375.57 -374.22 -3.18
Taiwan: Weighted 5623.85 -177.02 -3.05
Good luck, everyone.