American Economics – My Two Cents

by Andy Sutton / Graham Mehl

Over the years, we have written multiple times about the system of Keynesian economics, its dysfunction, and the fact that it is a pure lie. This has all been well-documented from studies, observations, right down to remarks made by Keynes himself regarding the long-term viability of his new faux economics.

However, from Keynesian economics, there has morphed another type of economics. A more ignorant and destructive type of scarce resource allocation – which is what economics really is after all – and this type is no respecter of persons, intellect, position, or influence. We could easily call it the economics of entitlement, but that would be misleading because when most think of entitlements, they think about Social Security, Medicare, and other government programs. No, that’s not where the sense of American (and global) entitlement ends. It ends with the average working stiff who is paying 20% on a $40,000 / 7 -year truck loan with a balloon payment because his buddies told him he wasn’t cool if he didn’t have such a truck. There are zillions of other such examples of financial stupidity, however, nobody is bothering to tell these folks that they’re committing financial suicide. The banks certainly aren’t going to tell them. The government? Talk about the kettle and the pot. Or maybe there is too much legal pot. We certainly can’t legislate common sense, but we sure try to legislate away the consequences of foolish behavior.

Yes, we feel we are entitled to have whatever we want, whenever we want, regardless of price or cost. Note there is a difference between price and cost. Price is the number of depreciated American dollars you need to part with in order to obtain the toy of the day. The cost is real amount of labor you pledge, lost sleep, heartburn you endure or other opportunities you forego in order to have that toy. Big deal guys, right? Well it is a big deal. We are going to show you quite a few charts today. You’ve seen some of them before, so part of this editorial will be an update of sorts, but then we are going to take a look at what individuals might do on an individual and community level to insulate themselves to some degree from the fallout that is inevitable from the decades of abuse of the true laws of economics.

Yes, ‘American Economics’ makes its own ‘rules’, and then violates them. Point in fact is the Gramm-Rudman-Hollings Balanced Budget Act passed in 1985.  Congress and various administrations have a rich history of making, then breaking their own rules. All for convenience, political or otherwise. All to change the lens by which the population views its circumstances. All to encourage the masses, like lemmings, to continue upon a path that is unsustainable for them, but very much desirable for those who seek to rule all who walk the Earth. Washington, DC is not the capital of this ridiculous system, but is merely a dot on a map. The real perpetrators have no silly notions such as national pride, national identity or even national borders as has become so glaringly evident these past two decades. We think you get the point. So without further delay, on to the charts!

Consumer Credit Outstanding (Andy’s Favorite)

We’ll lead off by saying this is no surprise. That the continued willingness by the US Consumer to run up debt shouldn’t be a surprise, but rather what it takes to disturb that willingness. Let’s take a look at a corollary chart, this one that looks at consumer credit as a percentage of US GDP:

Consumer credit outstanding sits just shy of 20% of GDP as of the last report in February of this year. People might not think this is such a big deal but remember, this is not ALL consumer debt, as paradoxical as that might sound. For example, this number doesn’t include mortgages or home equity loans. The metric includes the types of debt that are used to purchase consumer goods such as credit cards (revolving) and auto loans (non-revolving). In the current release of the report, the rate of growth (annualized) is 5.75%. By comparison, the annualized rate of GDP growth last quarter was 1.2%. So consumer credit growth is outstripping economic growth by a factor of greater than 4:1. This is a great example of ‘American Economics’. The Wall Street Journal, one of the biggest perverters of economics out there, strongly implied that a greater than expected growth in consumer credit in the July report is good because it indicates ‘steady household spending’.

Is there a line in the sand somewhere in here? Borrow beyond that and bad things happen? We know that at the sovereign level, the Eurozone countries started running into problems when debt levels passed 100% of GDP. Perhaps a little common sense kicked in at this point. Who knows where common sense kicks in for the consumer, but the chart below paints a somewhat lurid picture:

Looking above we see the irony of debt. Those with nothing borrow the most. Care has been pitched to the wind, the towel thrown in. The next group is the most interesting. They have little net worth. There is no real detail available about where the net worth comes from, but these folks are fighting the descent into the credit black hole. Notice that as net worth increases, the tolerance to take on debt increases, but only gradually. The same source that published the chart above stated that of households that carry a balance on a credit card, they average over $16,000 in credit card balances. Given the median household income is somewhere in the mid to upper $40K range, these households credit card debt / GDP ratio is somewhere around 30%. Don’t forget that this is JUST for credit cards, not non-revolving credit, and certainly not any type of mortgage, home equity, or student loan debt.

The Translation of Debt to Growth in a Fiat System (Graham’s Favorite)

The ‘school’ of ‘American Economics’ also badly butchers ideas of money, capital, and growth. The media and financial establishment touts the printing press as the solution to everything that ails us. We could drop money from helicopters a la Ben Barbasol Bernanke. How’d that work, slick? You printed a bunch of currency (not money), you blew up more bubbles than a kindergarten class turned loose in the novelties section of the dollar store, and you accomplished absolutely nothing.

This devious bunch asserts that capital is not the result of savings and foregoing of consumption, but rather is created by governments, with the aid the aforementioned printing press. They will never acknowledge that the federal reserve is not part of the government because then you poor people might wonder exactly whose interests that bank represents when it embarks on stupidity such as quantitative easing, ZIRP (zero interest rates to perpetuity), etc. They will certainly never tell you that every ‘dollar’ that comes into existence comes into being a financial bastard child – half improvised, half compromised. It comes into existence at interest. Owed to a private bank. By you. Don’t believe us; do your own homework, please.

Perhaps the biggest lie is that ‘inflation’ is necessary for economic growth. In a system where there is nothing backing the currency other than promises from old windbags in fancy suits, inflation IS economic growth. They are interchangeable concepts. Read the whitepapers and minutes from central banks around the world. Read the minutes from the latest meeting at Jackson Hole, Wyoming. Central bankers fear there isn’t enough inflation to ‘stimulate’ growth.


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Gold Seek

Various authors presenting analysis and commentary on the precious metals, economy and precious metals mining markets.