Karl Denninger of TheMarket Ticker provides insights into why recessions are a necessary part of our economic system.

Contrary to popular opinion, government intervention is not required during recessions, and most often results in hindering the rebalancing of the system. Denninger gives us the hard mathematical truth:

I don’t know how much larger one could have made the so-called “stimulus.”  But just as in 2003 it failed to produce lasting prosperity or turn around the economy because the Ponzi Economic “pull forward” on demand (via increased credit) had hit the wall.

That’s the ultimate failure of all of these so-called “economists.”  They simply disregard debt – on purpose.

This is idiotic, and worse, it’s intentionally misleading.  Anyone with half a brain knows that debt has to be repaid, and that if you have an economic system with $100 in currency and yet permit someone to loan what part of it they have at interest it is inevitable that the interest will ultimately consume all of the $100!

The answer to that is usually “emit more currency!”  Yet this leads to a second conundrum – one can only emit more credit or currency (both spend the same) at a rate that matches growth in output, lest you get inflation.  Inflation means that you really didn’t accomplish anything, as while there are more units of currency (and/or credit) available in the economy each one purchases fewer goods or services.

The only way to prevent this from happening is to accept periodic recessions in which both borrowers and lenders who take and make the weakest loans fail and go bankrupt.

That causes the credit and debt (remember, credit and debt are the counter-balancing entries on both sides of the balance sheet) to be removed – and balance restored.

Recessions are particularly hard on creditors that loaned capital unsecured, as they take actual uncompensated losses.  Those who loaned capital in a secured fashion get the collateral, which may adjust in price downward to it’s actual value, but it doesn’t go to zero.  The unsecured lender, on the other hand, is faced with a complete loss.

The feedback mechanism (losses suck!) cause lenders to increase the price of capital – that is, the interest they demand.  This in turn causes people to be more adverse to taking out credit for anything other than productive purposes – that is, to speculate or consume.

Through this natural set of feedback mechanisms (known as economic pain by those who experience it) the market works to restore balance – and protect the monetary system as a whole.

Government interference with this process always introduces undesirable distortions.  By picking winners and losers government causes misallocation of capital – that is, it subsidizes losing behavior.  By preventing fools from suffering their economic fate, government suppresses rates of interest charged for capital, which inevitably leads to negative real rates and thus speculative asset bubbles (after all, if you’re going to get paid to borrow, you will borrow as much as you possibly can!)

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We either accept the math and the damage that must be taken through our economy or we will suffer a political and economic collapse.

Those are the only options folks – we argue only “when”, not “what.”

Read the full article, complete with charts and math

We don’t need the government to help home prices, energy prices or employment to stabilize. The economic system will move towards equilibrium by cleaning out bad debt from the system – as long as the government stays out of the way.

Chances are that the government will not move out of the way. Thus, if Karl Denninger is correct about his mathematical assessment, then we should all prepare for the end result of their attempted machinations – and it’s not going to be pretty.

It seems to us that while Mr. Denninger attempts to provide a road map for our government officials to follow, he has also resigned himself to the likelihood of the end result being an economic collapse and destabilization of our entire system because no one in Congress is listening. The shit is going to hit the fan sooner or later, and as Denninger himself suggested in a previous piece If You Haven’t Acquired Self Defense Capabilities, the Time to Do So Was Yesterday.

We’d suggest that you also look into other ways to preserve your well being, as self defense capabilities will only get you so far if the system around us falls apart.