The consumer credit cancerMarch 9, 2008
Those who have experienced or witnessed the ravages of excessive credit card debt already recognize the evils of consumer credit, but the gravity of this cancer is probably even worse than you know. Modern economic theory associates inflation with growth, when in reality healthy economic growth is deflationary. As production increases marginal costs decrease – the more you produce, the less it costs to produce each extra unit. The reason people accept this false association is because most growth in modern times is no longer financed by capital derived from savings, but from new money created as debt to finance whatever expenditure is required. When a nation has no savings, capital can only be made available through inflation or foreign investment. Since the negative effects of inflation are well documented, it can thus be understood that nations can only produce so much new money without damaging the economy.
When scarce resources (in this case, new money through loans) are wasted on consumer debt the economy will yield no long term sustainable benefits from that cash infusion but will experience all the damages of inflation nonetheless. From a macro-economic perspective, it may be fair to describe a portion of that money as wasted. Over time, as lenders become more comfortable with their models and consumer credit rises (because it’s so profitable for lenders and borrowers really enjoy their TVs) the economy becomes increasingly dependent on such wasteful discretionary expenditures and the risk of collapse rises right along with it. As long as individual incomes continue to increase exponentially every year, an economy dependent on consumer spending financed with debt may not appear to be a problem, but if that growth ever flattens out or takes a dive, people are no longer able to borrow against their future earnings to finance consumption today and all that spending stops on a dime because their debt will remain to absorb any income they still have. Consumer credit could represent a ticking time bomb of disease with the potential to annihilate the economy and convert what could have otherwise been a minor recession into a major depression.
Many economists refer to savings as shock absorbers, because they allow people to maintain a reasonable standard of living during economic slowdowns until conditions improve. Consumer spending now represents 70% of American GDP, consumers are taped out, prices are rising, the economy is slowing… and needless to say, American consumer savings is negative. Buy a helmet and take some valium, the ride is about to begin.
Related posts:
2 Comments » |
Highest Rated |
Borrowing money to build a factory or exploit some other income producing opportunity is not a terrible way to build an economy because those assets can be reasonably expected to generate enough revenue to repay their debts, but consumer credit is a completely different animal. The worst possible reason to borrow money is for consumption. The only way an individual can repay their debt is by reducing consumption somewhere else, or by putting it off until next year. In other words, many people are sacrificing their future ability to consume in order to enjoy a bigger LCD television today. The TV may add some value to your quality of life, but it won’t help anybody produce better cars or faster internet connections.
That’s why the excessive debt accumulated during a bubble is so dangerous and needs to be purged during a recession in order to sustain long term growth. In recent decades, the geniuses at the Federal Reserve have worked hard to prevent such a purge, for political and other reasons. The end result is where we are today, and also the reason why central bankers are now so afraid of recessions, unlike previous decades. A nation like America with maxed out credit cards and unreasonable mortgages sustained by ridiculous real estate valuations is defenseless against even the tiniest of slowdowns.
Loading ...
I am known in some circles as a professional data miner.
Excellent post! I am a self-published author of a new book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” To make a long story short, this theory asserts that a population density which rises beyond some optimum level will begin to drive down per capita consumption. This occurs because the need to conserve space makes it impossible to use and store many products. Falling per capita consumption, in the face of rising productivity, inevitably yields rising unemployment and poverty.
This theory has major ramifications for U.S. policies toward population (like immigration policy) and trade. The implication for population policy is obvious. But why trade? It’s because these effects of excessive population density can actually be imported by attempting to engage in free trade with nations much more densely populated than our own. The economies of the nations involved combine. Manufacturing work is spread evenly across the combined labor forces. The more densely populated nation gets access to a healthy market while the less densely populated nation (the U.S.), only receives access to a market emaciated by crowding and low per capita consumption. The result is an automatic, irreversible trade deficit for the U.S., establishing a virtual host-parasite relationship.
Only a tariff structure indexed to population density offers any hope of reversing such a deficit. A falling dollar may help a little for a while, but doesn’t address the underlying root cause of the deficit - the disparity in population density. The more densely populated nation will soon simply cut wages and lower prices in order to maintain (or even grow) their share of the U.S. market.
If interested, you can learn more about this new theory and purchase the book at my web site, OpenWindowPublishingCo.com. It’s also available at Amazon.com.
Pete Murphy
Author, Five Short Blasts
My blog, How To Get Good Credit Gab, provides the opportunity to share thoughts, ideas and experiences about obtaining good credit and emphasizes the importance of building and maintaining good credit and the perils of personal financial mismanagement.
Please consider adding this video you your site:
http://www.youtube.com/watch?v=2fi0okku_X4