Sunday, September 14, 2014

Sixteen tons

"America's poor have never been deeper in debt," says Zero Hedge's anonymous avatar Tyler Durden, based on a story from Bloomberg.
Ever since the Lehman bankruptcy, one of the main reasons given by the perpetual apologists about why i) the so-called "recovery" has been the worst in US history and ii) the Fed has been "forced" to conduct 6 years of wealth transferring policies, boosting the stock market to all time highs and creating a record wealth split in US society between the super rich and everyone else (one that surpasses even that seen during the roaring 20s) is that the US consumer, scarred by the economic crash, has been rushing to deleverage and dump as much debt as possible.
Wrong, says the Zero Hedge writer. This is confusing deleveraging, that is, paying off debt, with throwing in the sponge and escaping debt through default or bankruptcy -- adding yet more trouble to the lives of society's worst-off, since they will henceforth be denied credit. And, incidentally, shanking the U.S. economy still further by reducing the population sector that can buy big-ticket goods, such as cars and houses, that most people need to finance through loans.

Bloomberg is quoted:
The improved finances, along with more recent signs that consumers are feeling comfortable about borrowing again, has given some economists cause for optimism: The more progress households make in getting out from under their debts, the logic goes, the greater the chances that renewed spending will boost growth. ...
There are various possible explanations for the poorest families' financial predicament. Incomes have declined, making debt burdens look worse. Some previously wealthier people probably migrated into the group as the value of their homes fell below what they owed on mortgages. More ominous is a steady increase in installment debt, a category that includes both student and auto loans -- areas that have recently seen a lot of questionable lending to lower-income borrowers.
While Pseudo-Durden has a point that the Fed and economists are out of touch with the reality so many un-elites are living in -- not deleveraging but piling up more debt against the day it will bury them or access will be barred -- he seems to ignore the larger point.

A healthy economy has a place for debt, but it does not use debt as fuel. In general people should be buying things with money they earn, not borrow. Which in turn means decently paying jobs and a wide-open field for companies and individuals to innovate.

Our current from-the-top-down, quasi-Marxist economy can't create such conditions. Over-regulation keeps business waiting to see what the government will do next instead of hiring and expanding. Fresh ideas are snuffed out in the cradle. There are areas where government can and should limit corporate actions (not because government is more moral, but just so that it supplies a balance of power). But an economy is so complex, so dependent on the knowledge and creativity of individuals at the sharp end, that no national super-power can manage it effectively.

The current state of play, as Bloomberg says, includes "a group of the poorest families, numbering roughly 14 million, whose precarious finances make them vulnerable to shocks and limit their ability to contribute to future growth. That's hardly a strong foundation for a healthy recovery."

You load sixteen tons, what do you get
Another day older and deeper in debt

-- Tennessee Ernie Ford

1 comment:

Stogie said...

Your last three posts on politics are excellent. Instead of forswearing politics, you should write more. I loved these essays, and your writing ability impresses me.