Since 1945, the US economy - and much of the rest of the world economy -
has been carried on the backs of American consumers. First, they spent money
they earned during the war years. Then, they spent money they earned in the big
boom of the '50s and '60s. And then they spent money they hadn't earned at all.
They borrowed from future earnings...increasing total US debt from just 120% of
GDP in the '70s...to 370% of GDP in 2007.
In the last 15 years of that period, especially, each time the consumer
showed a reluctance to continue spending, the feds rushed to give him more
credit. And during the final five years - the Bubble Epoque - debt
Now, the consumer has dug in his heels. He's not going a step further until
he unloads his excess baggage of debt.
Once again, the feds are trying to stimulate him. The Fed's key interest
rate is practically at zero. The feds are pumping money into the economy as fast
as they can. And they'll give a fellow up to $4,500 if he'll agree to kill his
old car. The Cash for Clunkers programs seem cruel to us auto enthusiasts, but
they have been popular, all over the world (more below.) But what good do they
Even with the stimulus spending...and the stimulating low interest
rates...he's still not willing to add debt. Of course, this is just what
happened in Japan. The public sector spent; the private sector saved. Net
result: an on-again, off-again recession that has lasted almost 20 years.
That's a depression. It's a point where the model no longer works. Look,
how could the US economy recover? It's a consumer-led economy, so the consumer
would have to spend more money. But he's not earning more money. He has no
prospects of earning more - not with 10% unemployment and a punky economy. So,
the only way he can spend more is by borrowing. Ergo, the only way the consumer
economy can grow is by adding more consumer debt. Is that possible? Could the
ratio of debt- to-GDP go to 400%...500%...to the moon?...
Encouraging people to buy too much was what caused the problem in the first
place. Encouraging them to buy more now is not a solution; it's just a
continuation of the same flawed policy of stimulating consumer demand...a policy
that has been in place for decades.
Saturday, August 15, 2009
More Debt Is Not A Solution
Bill Bonner's latest contrarian perspective on the 'recovery':