Bringing About Our Own Special Misery

Consumer confidence laid a rotten egg in October.  The Conference Board’s index of consumer sentiment was reported Wednesday at 39.8…its lowest reading since March of 2009.  To put this in perspective, during a robust economy, consumer confidence readings are at 90 and above.

Consumer spending accounts for about 70 percent of the U.S. economy.  Hence, consumer confidence is a key indicator.  If consumers do not feel good about the direction of the economy and their income they are less likely to spend money.

Obviously, consumers don’t have much to be excited about.  Stocks have gone sideways for the last 12 years, houses are underwater, and median middle class pay has dropped 7 percent over the last decade.  According to the Conference Board, about twice as many people now expect a pay cut over the next six months as expect a raise.  Others, including recent college graduates, can’t even find a job.

For example, as reported by the Bureau of Labor Statistics, the unemployment rate for college graduates under the age of 25 is nearly 14 percent.  Considering, too, that the Class of 2009 began their career years with an average of $24,000 in student debt, there’s a good chance many of those loans will go bad.  To help solve the problem, President Obama announced a plan on Wednesday to cap federal student loan repayments at 10 percent of discretionary income.

This solution, unfortunately, is like applying a band aid to a severed limb.  The money has already been spent.  No plan will make the debt go away.

Clearly, something is not right with the economy…

Sincere Inflation

Here at the Economic Prism we call the sickness ailing the economy…total debt saturation.  By this we mean the economy is overloaded with way more debt than it can support.  Conceivably, the economy could grow its way out of debt.  However, the magnitude of the debt is so massive that it’s preventing the economy from hardly growing at all.

Alternatively, the debt could be repudiated.  Where government debt is concerned this could occur explicitly by default or implicitly by inflation.  But no U.S. government leader would have the humility to admit that the nation spent too much money and that it was overtly defaulting on its debt.  So the only real solution is inflation.

This is confirmed by the actions of the government since the financial crackup of 2008.  Without question the government is seeking implicit repudiation of its debt through inflation.  The problem with inflation, aside from being robbery, is that once the government begins inflating the money supply, it is uncertain how far the effect of inflation will reach.  Moreover, it is uncertain if there will be enough political courage to stop it once it has been set loose.

When the French Revolutionary Government began inflating their money supply with issuances of paper currency at the close of the 18th century it was with a sincere effort to stem the tide of rough economic times.  But once started on a small scale it became impossible to control.

With each new issuance of paper money, after a slight appearance of improvement in conditions, the situation went from bad to worse.  This invigorated calls for the issuance of more paper money.  Ultimately, economic conditions deteriorated harming wage earners, laborers, and those living off savings the most.

Bringing About Our Own Special Misery

The financial system is vastly more absurd today than it was back then.  These days new money is issued in the form of debt based digital monetary credits rather than from a printing press mint.  What’s more, the capacity for buyers of government debt has been practically limitless.  But even that, too, may be coming to an end…

“Foreign central banks buy US Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody,” writes Bud Conrad of Casey Research.

“Without these central banks buying our debt, the US federal government would have to find a new source of funds or the result could be higher interest rates. Looking at the data on a monthly basis (and then multiplied by 12 to give the annual rate), here is the dramatic picture of how foreign central-bank purchases of our debt have shifted, from buying $500 billion to selling off $1 trillion.  At this rate of selling over several months, interest rates would go higher – if other things were equal.  Of course, things are not equal because the Fed has been forcing rates lower with its massive QE2 and other programs.  QE2 was $600 billion over nine months, or an annualized rate of $800 billion per year.  Since foreigners are selling off our government debt, Fed purchases of government debt are even more necessary.”

You know as well as we know where the Fed gets the money to purchase government debt from.  They borrow it into existence and then loan it to the government at interest.  No doubt, this is being done for well-intentioned reasons.  If they stop buying government debt, borrowing costs will rise, which will result in reduced spending, economic stagnation, and rising unemployment.  The problem, though, is that it’s a farce…and the Fed is past the point of no return.

While it is still unknown if the effects of the current policies of mass inflation will come to pass in a dramatic blow off, make no mistake, the financial shenanigans engaged in by the current class of government scoundrels will bring about our own special misery.

Before this is over the Occupy Wall Street protestors will have something to really lose their heads over.  In France, several centuries ago, the guillotine was the preferred modus operandi du jour.

Sincerely,

MN Gordon
for Economic Prism

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