Leverage: Money Talks, But Talk Is Cheap

Will cheap money destroy the world? Karl Denninger, noted political and economic commentator, thinks so. Denninger, author of Leverage and founder of Market-Ticker.org, presents simple and fundamental mathematic functions such as the Rule of 72 to expose our widely-flawed economic model. Primarily, he illustrates how our exponential debt increases cannot be sustained through our current economic framework – discussing our past and current structure as well as a consumer's impossible saddling of debt. Denninger spoke to Benzinga recently, providing additional color to Leverage and to add economic insight. Nationally (and internationally) by leveraging our debt, and as consumers by leveraging purchases on credit with exponential percentages that we can never afford to pay, Denninger's thesis is that our practice is an unsustainable model. “This is the underlying reality of these functions,” Denninger said. “At the point that you are backed into a corner you are close the point where you will be screwed.” In each of the historical examples, from the railroad boom and the Panic of 1873 to the "Roaring Twenties" and crash of the Great Depression – Denninger notes that when the market is allowed to correct itself – although painful – the market does indeed provide a natural correction. “History has a habit of not repeating itself, but it does rhyme," Denninger said. Leverage argues that the past thirty years of artificial constructs built into the framework of our economy are not only unsustainable, but will lay the groundwork for absolute chaos. The market's inability to flush itself through these practices needs to be fixed. The only right way to handle impending doom, Denninger posits, is to allow the natural course of economic downturn to occur. “If we don't do this – what goes down this road is bad for everybody," Denninger said. “This is not the kind of world anyone wants to end up in. . . The idea that we're going to bend the cost curve – you can't bend the curve.” “You could take all of the money, tax all of it, and you could not close the budget deficit," Denninger said. “Nobody is going to work and keep nothing.” Take our current housing paradigm, for example, as Denninger highlights in Leverage and again to Benzinga. This model is flawed in so many ways. First, the consumer is signing a deed with exponential interest for a, say, $350,000 home that the consumer can not realistically afford. Furthermore, this, say, realistically-valued at $150,000 house has been leveraged through market chaos to cost $350,000. Worse, this average consumer (although not doing their own homework prior to signing an agreement) has been led to believe that he or she can afford this house by taking on debt that increases exponentially with a salary model that does not. Simply said, Denninger argues – no. No, you cannot afford this house – and now, you are in a mortgage for a house that the market has inappropriately priced in the first place. Manipulations of this level are so high-up in the financial structure that the only way to get out is to default on a mass-scale and allow the market to correct itself. “This neverland mentality that we have.. this has to go away.," Denninger said. "[The] consumer needs to face reality.” The same simple argument applies to all topics versed in Denninger's no-nonsense rhetoric, from healthcare to college to the act of trading derivatives and naked sells. The "underlying rot" of our economic structures and framework need to be removed before we can move forward, Denninger states. It will not be easy, but it is necessary. “We have to talk about how we're going to restructure," Denninger said. In all, Denninger's writing is fluid, informative, and a must-read for any consumer – whether they are active in the market or are existing as most of us do –participants who are not being told the truth. More information about Leverage can be found here.