Today, we return to familiar territory. We have seen it before: the slowdown in the economy. The over-pricing of assets (particularly stocks). The huge increase in debt. The Feds’ quantitative easing (QE) programme.
But for all its familiarity, it remains strange and mysterious.
The foundation for today’s peculiar economy was laid in the ‘60s and ‘70s. In 1968, America’s money became – effectively – removed from gold. In 1971, foreign nations could no longer redeem their dollars for gold, making the dollar the world’s monetary reserve.
Thenceforth, the supply of money and credit was largely taken out of the invisible hands of a free economy, and given to PhD economists working for the US central bank, the Fed.
These economists had a theory, one that seems childishly naive, yet nevertheless seems to work in practice, so far. The more you could get people to borrow, they reasoned, the more demand for goods and services, and the more the economy would produce, giving everyone more access to jobs, incomes, and the satisfaction of getting something for nothing.
The theory maintained that as long as consumer prices didn’t get out of control, more and more credit could be added, stimulating growth.
After some shilly-shallying around in the ‘70s, the new credit-driven economy began to take shape in the ‘80s. Since then, $33trn of spending, buying, investing, producing, consuming and speculating has taken place – funded entirely by additional credit.
That is, if the level of debt/GDP had kept steady, there have been approximately $1trn per year less economic activity over the last three decades.
Is that a success for the PhDs? Or what?
“Or what?” is our guess and our question.
Bill Bonner on markets, economics & the madness of crowds
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During almost that entire time, from 1980 to 2013, not only did consumer prices not get out of control, instead, they seemed to come more into control, with gradually falling consumer price index (CPI) numbers (aided by jiving the figures!) from over 13% in 1980 to barely 1% today.
But here is the curious and incomprehensible part.
If you earned $100 a week, you could normally spend $100 a week. If you had $10 in savings, your savings would represent stored-up purchasing power. So you might choose, in one week, to spend that too. In that week, you would enjoy $110 worth of what the world had on offer. And the economy around you would enjoy an extra $10 worth of demand.
But the $33trn spent by Americans over the last four decades did not come from savings. Instead, it came out of the blue – from central banks and the banking system. It did not represent resources that had been set aside – like seed corn – to prime future growth.
No one ever deprived himself of a single meal or as much as a single beer to save the money. No one troubled himself to work even a single hour to earn it. No one toiled or spun.
Now, if the guy with the saved $10 lent it to someone else, and the borrower spent it, it would have the same effect as if he had spent it himself. So, if the economy had borrowed $33trn from savings and spent it, you’d see the same effect, right?
And what if the $10 or the $33trn couldn’t be paid back? Then, the savings would be lost. The savers would be out. But at least it would make sense. The autos, shopping malls, vacations, retirements, silly gadgets, health care scams, parasitic legal actions, and false-shuffle financial products would have been funded by real money. They would exist for a reason, if not necessarily a good one.
But what happens if the $33trn of pure credit, unbacked by savings, cannot be repaid? Who is out? Who loses?
And how did all those real things: the $33trn worth of goods and services come to exist in the first place, if there were no real money or resources ever made available to fund them?
Is anyone else concerned about this? Are we all alone here?
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