Wednesday, September 22, 2010

Crucial Error... Correction

In the last post I said, "Stimulus was our attempt to try to dig ourselves out of this debt hole by transferring the debt from the private sector to the public sector" and that the interests rates were "set low, ironically to encourage lending, debt, leveraging".

Stimulus was not an attempt to "dig ourselves out of this debt" nor "transferring the debt from the private sector to the public sector". Stimulus is our government's best attempt to keep this unstable bubble of an economy from popping. They do not want public sector debt to decrease, it would counteract their actions. They want banks to lend... for us to borrow more!.. but that is how we got into the mess we are in today!! It is not "ironic" that the government is setting interest rates historically low... they want us to keep that bubble inflated!!

So, we used the analogy before that "we are living in the equivalent of a $450,000 house with $100,000 ability to pay"... this is true. Our American lifestyles are fueled by debt, and thus are an illusion. Our debt is unsustainable and our economy shaky at best. The bubble wants to pop. People have seen the instability of debt personally and are unloading debt like the plague. Responsibility, frugality and savings are seeing a resurgence, and healthily deflating the bubble, but through stimulus and increasing the money supply the feds trying to reinflate it.

The stimulus and the TARP bailouts were our best attempt to keep he bubble inflated, keep our economy inflated, keep our currency inflated. In the last post we evaluated why we hear so much about gold and it's benefits, hopefully the gold investors are wrong. The only way inflation happens is if we incur more debt/ create more money than we are paying down. That is not healthy and will lead to another crash. If we want to recover and have a stable economy, we must let the economy reset itself. Deleverage. Otherwise this crap is going to keep on happening.

The government hopes that the debt bubble will suddenly become stable and then inflate it more!! More false growth!

So, how did this happen?

We have all heard of the "community reinvestment act" and the ways the government encouraged the banks to make "sub-prime loans". That is part of the picture, and definitely the main trigger that started the recession, but it is only a small part of the whole. Many cite "deregulation" of the financial sector or untethering the dollar from the gold standard (which both coincided with the rise of the financial sector as we see it today... causing income inequalities and overleveraging. )

There are many reasons and policies that led to irresponsible financial practices, the primary one being arrogance and taking affluence for granted. As Americans we often take for granted that everything is going to be great, without knowing what made us and keeps us great in the first place. We have been living off of our former glory and cashing in its good credit for all the debt it could leverage...(thanks John Maynard Keynes... that guy is such a jerk!) well we have finally reached the end of our credit line. Our cards are all maxed out. It is time to build up that credit again, one step at a time.

I know that economies and economics can be intimidating, but it works just like your household economy does. When you overspend at home do you cure it with more spending? Do you transfer it to another card? .. or do you stop going to the mall and stick to the essentials for a while?

I think this calls for a music video... our current status is the "hang over" part.

(BTW.. I am a super nerd and happen to love this video and think it rocks! ) If you felt like watching the video and memorizing the words I wouldn't not recommend it. It's actually very educational.

We have a long way to go if we are going to create a more stable economy, but if you just want to keep that bubble afloat, I don' t know what to tell ya.. but so far it's not working so well.

This all has to do with "Inflation vs. Deflation" argument among economists...

In economics there is a huge debate between inflation and deflation, and why printing money currently is not causing more inflation. Well... leveraging, printing money out of thin air through the financial sector, has the same effects as printing money. Illusionary dollars created by debt act the same as real printed dollars by the fed. Our "bunkering down" during the recession by increased savings rates and paying down our private debt (deleveraging) is countering the inflationary forces of money printing (monetization).

If we were to stop printing money at the same time as deleveraging and increasing our savings rate, we would be reducing the amount of dollars in circulation by taking from society the illusion of dollars created by debt... this would result in deflation. Deflation strengthens the purchasing power of each dollar, which is good for you... but if it happens too quickly your wage would may be reduced so your boss could still afford to pay you, since his products would be sold at a reduced price. Now all that would even out if you did not have any debt. The worst part about deflation is that your debt burden (mortgage) would become heavier. You would be paying the same bills with less dollars.

Inflation vs. Deflation is a very controversial economic topic, and for the last 100 years the inflationary side has been winning, but inflationary economics creates the bubbles that we see today.

Deflation is not a fun process, but it may be the price that we must pay to recover from our lavish years of debt. When people tell you to get out of the stock market and pay down you debts, this is what they are not saying. They feel that deflation may be on its way. If we are to have a real and permanent economic recovery, your debt may prove to be a vulnerability. Those without debt will be much more likely to ride the wave.

If you want to hear the pro-deflationary argument, here is an informative audio book on the subject...

No comments:

Post a Comment