We're All Madoff - This is an uncomfortable reality, but it is reality"
By Karl Denninger

"Mr. Madoff stands accused of (in his own words) running "a Ponzi Scheme."

In fact, our entire economy over the last ten years, and really back to at least 1987, has been roughly equivalent to what Mr. Madoff was doing.

So has our government.

Let's go down the list of things that have been inflated beyond their natural boundaries, and look at how each and every one of them was destined to collapse--and why they're all collapsing at once:

The Internet Bubble

While there were companies that made a real pre-tax operating profit (and a real net profit), mine included, the vast majority of the firms in the Internet space did no such thing. They reported "pro-forma" earnings, used EBIDTA (that's earnings before interest, depreciation, taxation and amortization, as if none of those things count) while levering up (meaning: interest was going to continue to rise!) as their primary profit gauge, and in fact operated with leverage ratios (total assets deployed to tangible equity - that is, value) that were in the stratosphere.

In short they borrowed to pay back their previous loans and make payroll, and when the lenders (which were in some cases equipment manufacturers) realized that they'd been had, the entire house of cards came tumbling down.

The Housing Bubble

Homes, as a place to live, must be able to be purchased for a reasonable percentage of one's income. What's "reasonable"? History says that this is 28% of your pretax income for all your direct household expenses (principal, interest, taxes and insurance plus mandatory spending such as utilities and a maintenance reserve) and 36% of your pretax income for all debt service including household and other. Note that at the "maximum leverage" that is sustainable you have only 8% of your pretax income available for "other debt service"; how many people can meet that? Think folks - if you have a $100,000 income, this means you have only eight thousand dollars for all payments on other debt. Two modest car loans and their insurance will exceed this limit for someone who makes $100,000 - and we're talking Ford's here (small sedans too, not SUVs), not Benz's or Lexii.

As these ratios were exceeded in order to remain "affordable" increasingly exotic terms were required, starting back in 2001 when the car makers were cajoled by the Bush Administration to put forward their "Drive America" program with zero-percent interest for three years. As this crept further and further into our economy mortgage programs that were in fact not mortgages (as there was absolutely no possibility of the borrower paying them off on the original terms) were pushed in order to keep property values climbing. In 2007 the limit of this insanity was reached, the "last sucker" was found, and the pyramid collapsed as these so-called "mortgages" were exposed for what they really were - a serial-refinancing scheme designed to strip equity and transfer it to the bankers. The entire scheme collapsed and along with it our markets and economy.

The Stock and Credit Markets Generally

The Internet Bubble and Housing Bubble were the externally-visible symptoms of what was going on behind the scenes. The S&P 500 was posting "earnings" of more than $100 a share, but those "earnings" were a phantom. "Private Equity" and "Hedge Funds" were buying companies and essentially flipping them using debt backed by bank credit that was, like in the housing and Internet markets, backed by nothing other than vapor.

Commercial Real Estate deals were being done at "cap rates" that were unbelievably optimistic, essentially not even paying the interest due, banking on the ability to roll the debt as "property values never go down." Anyone remember "M&A Monday" on CNBC through all of 2006 and the spring and summer of 2007? What was that all about, if not flipping companies like speculators flipped houses?

Our Government's Finances

We put into place Social Security and Medicare, two schemes that have accumulated fifty three trillion dollars in forward liabilities with zero in assets behind them. These liabilities are growing at a rate several times that of GDP. Then, as if this wasn't enough, we passed "Medicare Part D" which has now added even more to the liability side of the balance sheet but which was and is totally unfunded by assets. This both can and will collapse just as did the Housing and Internet bubbles. Our government has been spending money it doesn't (and never will) have for a very long time, but we have now entered the phase (just like the Internet and Housing Bubbles) where debt is increasing at an exponential rate compared to assets.

We have, in the last year, nearly doubled the outstanding public debt commitments on the United States ($8 trillion added against a $10 trillion base), with the previous $10 trillion itself having doubled from $5 trillion in the space of just a bit more than a decade.

There are many who say that our government debt-bubble will not collapse, and they list a whole host of reasons.

Why would you believe that?

Can you show, through history, one speculative bubble that has not popped?

Can you find one time - just once - that such a bubble was able to be grown without limit?

Simply put: No.

b0b wrote on Dec 22^nd, 2008 at 2:27pm:


Oh please, money comes from the Sun?  What kind of hippie ass religious nonsense is that article even about.

The ignorance of people is fucking mind boggling sometimes.  I weep for this world and its population of sheep.