Though this be madness, there is method in it

Karl Denninger, the publisher of “The Market Ticker”, in an exclusive interview: “In order to honestly assess what’s going on and what has to be done to fix the problems, we first must admit our mistakes.” Furthermore he says why the financial system is more and more a farce, gives his stance on the prospects of a military dictatorship in the United States, and explains his position with regard to Peak Oil.

By Lars Schall

Karl Denninger, born 1963 in the Midwest of the United States, is the former CEO of MCSNet, a regional Chicago area networking and Internet company that operated from 1987 to 1998 when it was ultimately sold to Winstar. MCSNet was proud to offer several „firsts“ in the Internet Service space, including integral customer-specified spam filtering for all customers and the first virtual web server available to the general public.

Since 1998, Mr. Denninger has been a full-time trader, and is the author of The Market Ticker (, a daily market commentary, and operator of TickerForum, an online trading community, both since 2007. In 2008 he received the 2008 Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the 2008 market meltdown.

Karl Denninger lives in Niceville, Florida, U.S.A.

Mr. Denninger, why did you start your blog and the Ticker Forum in 2007?


The same basic game – that is, try to con people into taking on leverage where there was no real valid business model to back it up – was run in 1990s in the technology space, and bankrupted many individual investors. When the Asian Market panic in early 2007 happened, and I started digging around for the underlying reasons, I found the same rot in the financial system that used to be in the tech space.

It was then that I decided that I was not going to sit silently and watch people get skewered twice, and began writing on the various topics related to the economy and markets – and what was, inevitably, to come.


What surprises you the most when you look at the financial / economic crisis that is unfolding for more than two and a half years now?


The single-most surprising feature of this mess, as with the Internet space, is the number of people who are unwilling to analyze these situations on the facts and admit that what happened in the past occurred due to flatly-unsustainable economic and financial actions by both government and individuals. That is, far too many people have come to believe that they’re entitled to something they didn’t actually work for or build – whether it be through home equity extraction or betting on the “next big company” in the technology space.


Why is there so much weak will out there to put more aggressive regulation in place?


Two words: Regulatory Capture.

There’s more than that as well, of course.  Everyone loves a rising stock market and nobody likes a crashing one.  That includes lawmakers, who can trade on inside information relating to their lawmaking with impunity – unlike you or I, it’s not illegal for them.

Actually changing course, in addition, means admitting you were wrong.  Three words you never hear out of a politician are “I blew it.”  But in order to honestly assess what’s going on and what has to be done to fix the problems, we first must admit our mistakes.


If you could have it your way: What would you suggest would fix our financial problems in the most effective way?


First, accountability.  Screwing people through intentional omission (or commission) is a crime.  We need no new laws, the current ones will do just fine.  Those who commit such acts have to be held to account and, when appropriate, punished.

Second, we must clean the financial system of the excessive debt that these corrupt practices caused.  Unfortunately there is no other way to resolve the root cause of the problem, and thus there is no other real option available to us.  This is going to result in a very significant downward move in GDP, at least on a temporary basis, perhaps of as much as 40%.  That sounds (and is) horrific, but there is in fact no other option.

Finally, tax reform and some sort of effective means to prevent mercantilism from “working” for those nations that decide to engage in it in the future has to be a part of the structure.  I favour The Fair Tax on the tax side, and some sort of wage-parity tariff system to discourage mercantilism such as we have seen over the last two decades with China.


It’s seems by now that the top economies of the world gave up their plan to exit the Great Recession with stimulus spending. At least Europe is signing up for austerity for sure. What will be the outcome for the euro-zone of this new motto “stimulus is dead, long live austerity?1


Short-term pain and lots of it.  But it’s the right answer in the intermediate and longer term.  You can’t drink yourself sober.


Another element few seem to consider is the end of duty free trade in the euro-zone and future trade implications within the EU. Is this something that you are afraid of?


No. Wage parity is a major problem – unless we all want to live like cave men, which is where global wage arbitrage eventually leads, we have to recognize that abusing people for cheap labor when they have little other option (especially when the very same corporations destroy their farms and original options, as has happened in developing nations such as China), is both unsustainable and not in the interest of those who think they’re getting a benefit from it – on either end of the transaction.


One consequence of the euro-crisis is the call for a collective financial / economic policy of the EMU-nations. May this have been the goal of the “war of aggression against the euro-zone” (Joachim Sanio of the BaFin) right from the beginning? Or is it by chance that a) George Soros is part of the attack against the euro, whereas b) he also supports that collective financial / economic policy of the EMU-nations?


Collective economic policy is another word for “one nation.” Fiscal sovereignty, along with borders, are where national sovereignty begins and ends. It would be a severe mistake for nations in the EMU to entertain this sort of nonsense.


Nazi Germany was allegedly defeated. Loss of national sovereignty doesn’t have to come at the barrel of a gun – it can also be given away


Don’t do it.


How do you judge on the fact that commentaries in the United States and the UK (among others Capital Economics, IDEA) are very negative vis-à-vis the developments in the euro-zone, whereas they try to pretend that everything in the U.S. and the UK is just fine and dandy?


Well when you’re in deep trouble you always look for someone who’s in bigger trouble.  If there are two guys drowning in a pool if you can stand on the other guy’s shoulders you might get out.


It’s rather boorish (at best) but it doesn’t really surprise me that such a tactic would be adopted by certain “mainstream” commentators.  The fact is that the US has the same sort of budgetary deficit as did Greece, and the UK is not really in any better shape.  The UK can, in fact, be argued to be in dramatically worse shape than most, simply because most of what they do now days is “finance.”


But finance is a parasitic thing.  Every dollar made by a bank is one taken from someone in the productive economy.  There’s no production there – only skimming.


Is the financial system more and more a farce in your opinion?


Yes. It’s supposed to be against the law to front-run, but we have people who figure out how to do it with computers, and we call it “ok.” Even when exposed, it’s not stopped.


It’s supposed to be against the law to defraud people – to sell them something that you KNOW is garbage without disclosing it.  But the record is replete with banks that did exactly that – they were documented to have called some of their securities “vomit” – internally – while representing them as “great buys” to customers.


Then there’s outright bribery. In the US we have municipal officials sitting in prison right now who were charged with and convicted of various forms of bid rigging and fraud in financial deals.  The banks were complicit in those deals and profited from them – directly.  Yet none of the banks have been indicted, even though in order for there to be a bribe or other similar crooked enterprise someone has to offer it and someone else has to accept it.


In any reasonably-just world such a discovery would lead to immediate criminal fraud and perhaps even racketeering charges.


Related to my former question: Why do you think the stock market has rallied some 70% off its lows a year ago, even though nothing has been really done to actually address the root causes of the financial crisis?


Skittles. Seriously.


There are a lot of people who believe that “it’s all ok.”  I don’t know why or where they get this idea – we have replaced 11% of private final demand with government deficits in the US.  That replacement has resulted in a huge market rally, but it’s not sustainable any more than Iceland’s or Greece’s situation was.  Of course this isn’t talked about in the mainstream media either.


Mr. Denninger, while the financial interests of the upper class and big corporations in the U.S. were served very well during the last 30 years, the American middle class is eroding. Is there actually a war on the middle-class going on in your country?


Not really.  Most people here in the middle class did it to themselves.  It’s a nasty thing to say, but it’s true.


Fact is that if you work at McDonalds flipping burgers you can’t afford a $500,000 house, and you know it.  Yes, people were SOLD that house, but they weren’t exactly acting without their own blinders – fueled by greed – firmly over their eyes.


If you read the press here you see the reports all the time – people lamenting going “broke” while on unemployment, but they still have their $100/month Cellphone plans, their $100 cable bill, and other similar luxury items, even though they lost their job a year ago.  You’d think that when someone loses their job they’d immediately get rid of those unnecessary luxuries and trim back.


You’d be wrong.


So the American middle-class is facing difficulties, the majority of Americans is trapped in debt and the state within the state, the so called National Security State, seems to be in preparation since years for the handling of civil unrest in the future. You had Patriot Act I, II and III, the Posse Comitatus Act of 1878 was overturned, the lights of the Constitution can be switched out easily by Continuity of Government provisions, and the Federal Emergency Management Agency (FEMA) is given military police powers. The inter-connection between all of those things was pointed out already in November 2005 by Al Martin this way:


Why is all of this being done? Why is the regime moving to a militarized police state and to a dictatorship? It is because of what Comptroller General David Walker said, that after 2009, the ability of the United States to continue to service its debt becomes questionable. Although the average citizen may not understand what that means, when the United States can no longer service its debt it collapses as an economic entity. We would be an economically collapsed state. The only way government can function and can maintain control in an economically collapsed state is through a military dictatorship.”2


Do you share this opinion expressed by Al Martin in 2005?

Yes and no.  Are they worried about economic collapse?  They should be.  More than two years ago I sent a letter to all 535 members of Congress urging them to put together a plan to house and feed up to 25% of the population.  “Three hots and a cot” – not “housing” per se, but literally three meals and a place to sleep.    Why?  Because a man who has lost everything has nothing left to lose, and that’s bad.  It’s also possible as a consequence of our failed economic policies and the intentional acts of those in and attached to our government, and if the government isn’t thinking about this they’re flatly insane.


What’s even more insane is that the people responsible for these failed policies have not either changed their tune or been removed – either by the voters or by the Executive and Congress on its own initiative.  After all, history is replete with examples of what frequently happens when you try to push authority too far (e.g. Marie Antoinette.)


But a military dictatorship is extremely unlikely in the United States, because we’ve experienced it before in this country and have a rather strong aversion to it in our collective blood. Among other things we have the Second Amendment, and it is precisely for the purpose of preventing that outcome that it was written into the Constitution.  If you recall the US was effectively under a military dictatorship just prior to 1776.


It’s something to keep on the radar screen but I am not in the camp that COG (continuity of government) provisions would have the desired effect.  I suspect that were imposition of a military dictatorship attempted in the United States the result would be immediate civil war, and the government is well-aware of that.  Indeed, The Declaration of Independence sets forth that outcome as an unalienable right of all persons everywhere.


I guess you could say that I have a “watchful” posture in this regard, but am not in the “vast conspiracy” camp, simply because I don’t believe such an attempt could succeed here, incremental changes in rights or not, and I also believe that the government knows it.


Can it be that the democratic façade of the Western states is burning slowly but surely down and that the original Gangster and Pimp nature of the state reveals itself once more? I mean, in case I understood theorists like Adam Smith and John Locke right, the original role of the state was to defend those who hold property from those who hold not.3 Isn’t that pretty much the situation we’re in?

Yes, but the biggest pimps and gangsters aren’t in the government. The government just gives them cover for their actions.


Most of the bribery and fraud happened in the private economy and was conducted by private actors.


Do you think it is best to get ones money out of the banks and the stock market by now? Or is it rather irrelevant that the Securities and Exchange Commission (SEC) plans for example to abolish the legal right to redeem money market accounts?4


If the FDIC fails to be able to cover your deposits you need guns, not money.  That would truly be an economic collapse. I am thus unconcerned with such an outcome, as the “end of the world” only comes once and if you win that bet you can’t collect. It is therefore prudent to prepare for the possibility, but having done so with various emergency supplies attempting to go further is, in my view, a waste of time.


What are your thoughts on gold and silver given the current circumstances? Are they safe havens as “real money”?


No. The government will simply tax your wealth out of existence if you try this. Remember, FDR literally stole people’s gold.


They won’t do that this time, but they’ll be far more destructive.  You’ll have your gold, the price will go from $1,000 to $5,000 an ounce, and they’ll simply hit it with a 90% capital gains tax.  So you have a whopping profit of $4,000 out of which you’ll be able to keep $400, but the currency you are paid in will be worth zero.


That didn’t work out so well did it?


Trying to “escape” the system is a waste of time. Further, I don’t expect monetary collapse in the United States.  It is more likely in the EU, simply because the EU’s foundation is fundamentally flawed and if the Euro collapses you’re in big trouble.


What most people miss is that such an event, if you live there, usually comes with violent revolution or worse.  If you have a bunch of gold there is always someone with more guns than you have, and that person soon has both the guns and your gold.  It’s not just the private parties you have to concern yourself with in that regard either – never underestimate the desire and willingness of a government to tax the everloving hell out of anyone trying to evade the structures they have put in place.


Let’s change the subject towards the end of our interview. How do you reflect on the “oil spill” in the Gulf of Mexico?


It is emerging, if reports and testimony are to be believed, that critical safety measures were not observed prior to the explosion and allegations have been made that work proceeded with actual knowledge that these systems were non-operational.


That’s damning.  But what’s worse is that it appears MMS, our regulator, was fully aware of these facts and did nothing.


Private parties have limits in what they can do in terms of damage.  When government gets involved with a wink and a nod, well, you get what we got.  It is my opinion that the government is at least as culpable as any other actor in this disaster, including criminally culpable for the death of the men on that rig, as it appears they were fully aware of the problems and decided to do nothing.


Some pundits begin to argue that this situation in the Gulf takes your country into a “peak oil” kind of scenario. The concept of „peak oil“ says that the outgrowth of oil becoming more difficult and expensive to extract. What is your attitude towards “peak oil” and the relation of it to the pictures we see of oil gushing out of a pipe a mile deep in the ocean?


The “easy” oil has been burned.  There’s a lot of oil – it’s just expensive to get.


More importantly, oil is just hydrocarbon chains.  We have lots of carbon (some would say too much in the form of CO2) and the sea seems to be full of hydrogen (in the form of water.)  All chemical processes can be driven “backwards” if you have the energy to do so.


Germany perfected the coal to oil process during WWII.  But in point of fact coal is just carbon in a reasonably-pure form, so we’re back to “got energy?”


Oil will continue to trend higher in price, but at some price it makes sense to build nuclear plants by the boatload and create all the oil we want.  It’s about money and cheap oil, not the inability to have oil.


We use liquid hydrocarbons because there is no better means of portable energy storage.  Petroleum isn’t an energy source, it’s a battery – the energy came from the Sun.  Being able to stuff 100,000 BTUs of energy into a one-gallon jug is a big deal, and we have nothing that gets anywhere close available to us in “alternatives.”  Ethanol is technically a “hydrocarbon” if you want to be pedantic – it contains only carbon, hydrogen and oxygen.


Batteries cannot replace these fuels because a battery has to carry its oxygen internally, where a fuel is burned using oxygen from the atmosphere.  That’s the root cause of why energy density is so poor comparatively for all battery “replacement” ideas.


Do you think that this “oil spill” will be used as an apology for an oil spike like the one in 2007-08 which will in part be used to explain the upcoming destruction of the economies worldwide?


Oh I doubt it.  The spike was clearly speculation driven. Good luck making that work again into collapsing demand in the developed world.


In the longer term Chinese demand is a real issue…


I agree.


…but that’s down the road, and it presumes they don’t blow up economically too.  I wouldn’t take that bet – if anything their credit bubble is at least as severe as ours, and may be worse.  Accurate data from that nation is impossible to obtain.


By the way: what were in your estimation the causes for the oil price spike in 2007-08 that we all can still remember?


Speculative premium, primarily – but not entirely.  There were real supply constraints as well.


All bubbles go through this sort of rotational trade as they prepare to blow up.  This one was no different.  It was apparent in certain stocks too – you could see the rotation on a daily basis between various issues as people were literally clawing at the cliff with their fingernails to keep the market from collapsing.


Of course you eventually rub your fingernails to nubs, and at that point down we go.


Mr. Denninger, one final question. President Obama has to face a “growing credibility crisis.”5 With regard to it I found this quote in the Financial Times:


“’The bottom line here is that Americans don’t believe in President Obama’s leadership,’ says Rob Shapiro, another former Clinton official and a supporter of Mr Obama. ‘He has to find some way between now and November of demonstrating that he is a leader who can command confidence and, short of a 9/11 event or an Oklahoma City bombing, I can’t think of how he could do that.’”6


What do you think when you read such a thing?


That he’s cooked come November.  Odds are high the House goes „R“ and the Senate, while it probably won’t flip, will be too diluted (close to neutral) to matter.  Nothing he wants to do gets passed come January 2011, which in fact is a GOOD THING.


Thank you very much for taking your time, Mr. Denninger!

1 compare Gregory White: “G20: The Time For Stimulus Is Over, Long Live Fiscal Austerity”, published at Business Insider on June 5, 2010 under:

See also Marshall Auerback / Robert Parenteau: “The G20 Votes for Global Depression”, published at New Deal 2.0 on June 7, 2010 under:

2 Al Martin, “FEMA, CILFs and State Security: Shocking Updates,”, published November 28, 2005 at:

3 compare Adam Smith: “An Inquiry into the Nature and Causes of the Wealth of Nations” and John Locke: “Treatise of Civil Government” as quoted in Michael Parenti: “Contrary Notions”, City Lights Books, San Francisco, 2007, page 243.

4 Geoffrey Batt: “This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied”, published at Zero Hedge on January 3, 2010 under:

5 compare Edward Luce: “Obama faces growing credibility crisis”, published in The Financial Times on July 13, 2010 under:

6 ibid.

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