Total Abandonment of the Rules of Common Sense

U.S. consumers are doing what they do best.  After a six year hiatus, they’re back at it.  Consumers are eagerly borrowing money.  What’s more, they’re spending it!

According to the Federal Reserve Bank of New York, U.S. consumer debt rose during the fourth quarter of 2013 by the most in six years.  “Household debt increased 2.1 percent, or $241 billion, to $11.52 trillion,” reported Bloomberg, “the biggest gain since the third quarter of 2007.”  Evidently, consumers went in hock to buy homes, cars, and pay for education.

Economists applauded the news.  ‘“Signs that consumers are starting to releverage again and take on more debt is consistent with the idea that we’re turning a corner on the recovery,’ said Tim Duy, a professor at the University of Oregon in Eugene and a former U.S. Treasury economist.”  Naturally, this consumption is a big part of what propelled fourth quarter GDP to a 3.2 percent growth rate.

But is increasing household debt really something to get excited about?  Not from our unobstructed viewpoint…located far away from the clouded brains that comprise a college economics department.  For what good is an expanding economy if its growth represents growing debt?

The way we see it, this is growth that’s being borrowed from the future.  These debts will need to be repaid over time.  Moreover, to do so, consumers will have to subtract wealth from tomorrow’s economy.

Hindering Productive Commerce

But what do we know.  We can’t comprehend much of what passes for popular economic thought.  It all seems like unadulterated gibberish.

Take this week’s drivel from Federal Reserve officials.  “Three Federal Reserve officials on Wednesday said they believe the U.S. economy is gaining traction despite a recent slowdown from severe weather, allowing the central bank to stick to its plan to wind down its massive bond-buying stimulus this year.”

Nowhere did the Fed officials question the utility of buying bonds in the first place.  What value did it provide?  After five years of QE, we still don’t understand its benefit…we’re shocked it ever came to be in the first place.

As far as we can tell, it didn’t do one lick of good for the economy.  But what is clear is that it robbed the deposits of three generations of savers and reduced fixed income retirees to a level of subsistence living.  With the aid of the Federal Reserve, Bank of America 12-month Certificates of Deposit are paying the insulting rate of 0.06 percent.

When it comes down to it, what really can the Federal Reserve do to improve the economy?  They don’t produce anything.  They don’t create or invent anything.  They don’t generate jobs.  Rather they manipulate the price of money and credit and hinder the ability for productive commerce.

Total Abandonment of the Rules of Common Sense

“Vibrant economies, not central banks, create real money,” clarified Steve Forbes in the February 10 edition of Forbes magazine, “and wealth is abundantly created when tax rates are low, money is stable and regulations are reasonable.”

Just think, the Fed’s great monetary experiment has been an unnecessary and destructive affair.  Yet it continues to drag on the economy.  And its deleterious effects will be felt for years to come.

Of no small note is the fact that it has allowed the federal government to run up the debt, run up taxes through the clandestine inflation tax, and control every aspect of its citizens’ lives.  On top of all this, it has allowed politicians to make promises it can’t afford to people who are undeserving of them.  Intergenerational liabilities of social security, medicare, and now Obamacare could have never been extended without the Fed’s intervention into credit markets.

Obviously, something has gone horribly wrong.  The main cause, as best we can explain, is the near total abandonment of the rules of common sense in the dealing of money and credit.  Old standards, old principles, and basic thinking have given way to quack economists and shameless political swindlers.

Above all, we’re left to marvel at the vanity of their handicraft…

Yellen will “stand up for American workers, protect consumers, foster the stability of the financial system, and help keep our economy growing for years to come,” said President Obama – with a straight face – upon Janet Yellen’s confirmation as Fed Chair.

Need we say more?


MN Gordon
for Economic Prism

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