Bleeding Off the Chart
People increase wealth by saving and investing, not by consuming. It seems economists have forgotten this simple equation.
Encouraged by easy credit and the federal reserves’ monthly diet of interest cuts, the average American continues on a spending frenzy.
Last year the American economy continued to slump against the background of a federal tax reimbursement, continuous cuts in interest rates, and rampant cash and credit expansion. For a major economy to move into recession while under such a rampage of stimulants is unprecedented.
Now come the latest indicators—and, at April’s end, every principle indice used by the armchair analyst looks great! U.S. productivity number okay, Gross Domestic Product spot on, consumer spending rocketing along.
But—what is missing from the U.S. economic equation right now is capital investment. Without investment in new products, new factories, new businesses, there is no increase in profits, hence no incentive to hire and no increase in income generation from which to fund new investment.
The bottom line is, the U.S. economy is seeking to fund its massive debt by raising more credit. This is a recipe for disaster. The result since 1999 has been the worst profit performance during the entire post-war period!
Barron’s Online published a chart recently that received little exposure but which deserved the closest of attention. It traced the growth of credit through the 20th century up to the year 2000.
The chart shows total credit market debt from 1940 to 1980 as mostly a flat line, with total credit market debt as a percentage of gdp being about 130 percent. Working back to 1929, the graph peaks at 260 percent, in the year of the big financial crash that started the great depression of the 1930s.
Working forward from 1980 to the year 2000, the line of total credit market debt rockets skyward to nearly 300 percent of gdp!
As author and publisher Bill Bonner wrote, “The chart reveals only two such binges in the entire 20th century. The first wrung itself out in the 1930s. The second bleeds off the chart, its [final unraveling] denouement still ahead of us” (www.dailyreckoning.com).