There are some bright spots in the American economy, but look beneath surface. Stefan Karlsson warns that the downside of bad policy may have been merely postponed. The private sector has a weaker financial savings than it ever had before during booms, which will strongly limit its ability to increase spending. Alan Greenspan and George W. Bush did not prevent the stock market bubble of the late 1990s from turning into a crisis. They only postponed it. [Full Article]
Source link: http://archive.mises.org/2703/americas-unsustainable-boom/
America’s Unsustainable Boom
Previous post: Hyperinflation: Why It’s Coming
Next post: First Rule: don’t make the system worse off
{ 10 comments }
“But the sector that poses the biggest threat to the economy is the household sector which is spending and borrowing at an unsustainable level. The household savings rate which in the early 1980s was more than 10% of disposable income is now only 1% which is a record low and actually somewhat lower than when the stock market bubble reached its peak. At the same time household debt has risen steadily, from roughly 65% of disposable income in the early 1980s to 80% in the early 1990s to 95% in 2000 to 114% in the second quarter of this year.”
Mainstream economists whom I like to call the ‘consumptionists’ will tell you that this is actually a good thing. They will tell you that all saving is bad for the economy and that consumption should be maintained at all costs. This is of course one of the main excuses for inflating the currency and the reason why we are being told that the hurricans in Florida actually helped the economy.
I was surprised that Hans-Hoppe let these economists completely off the hook in his chapter on time preference in his book Democracy: The God That Failed and referred only to government taxation as having a negative impact on people’s time preferences. I would say that economists inside and outside of government, through monetary policy and promotion of the consumption doctrine are having a negative impact on man’s time preference as well, as indicated by these troubling statistics on savings.
“Installment Credit is no more inflationary than any other loan, and it does far less harm than business loans because it does not lead to the boom-bust cycle”
“It is the expansion of credit to business that overstimulates investment in the higher orders, misleads business about the amount of savings available, etc. But loans to consumers have no ill effects. Since they stimulate consumption rather than business spending, they do not set a boom-bust cycle into motion.”
“To generate the business cycle, inflation must take place via loans to business”
Murray Rothbard from America’s Great Depression
As Rothbard stated it was inflation at the corporate level that set the boom bust cycle in motion during the 1990′s…..
today corporate finances have been repaired…..there are many calling for a bust by consumers….but Rothbard states…
“loans to consumers have no ill effects”
inflationary ? yes, but they don’t set the boom-bust cycle in motion…..
there is no consumer bust coming……not until inflation returns to corporate america’s finances
I get the impression that although foreign central bank purchases of dollars has been going on for a long time, but that the “massive” purchases are relatively new, i.e., 6-8 years. Can someone answer this?
Housing investments don’t seem to be equivalent to installment credit.
Foreign purchases of American paper – bottom line is American money can ultimately only be spent in the USofA. When the govt paper comes due, what can China do with the American money? Buy more paper, buy American goods and services, invest in American businesses, or buy American real estate. How does any of these options harm American workers?
If interest rates are at 4% & this is less than combined inflation plus economic growth then we have real negative interest in terms of proportions of foregone present & future incomes.
It is hardly surprising that savings rates are low & perhaps more importantly that people have a strong incentive to leverage as high a mortgage into property as possible. This leads to overvaluation of property & the situation where a small revaluation will make the mortgage more than the property value.
Regretably having increased the problem I don’t see the answer. The best option would be to increase interest rates & bring on a recession immediately so as to prevent a worse one later. Maintained long term this would also improve savings & thus investment. On the other hand it would also result in the lynching of all those involved.
I question that the dollar has to fall against foreign currencies,including those of Asia, any time soon. The only way to estimate the fundamental value of the dollar versus, say, the yen, is to track purchasing power parity as Harry Browne used to do. In the absence of PPP comprarisons, I’m afraid estimating the dollar’s value against anpother currency is strictly guess work.
The money supply in the USA, as measured by Frank Shostak’s Austrian money Supply (AMS) may be increasing at roughly a 5% rate–about in line with the growth in the monetary base. My guess is that’s not much faster than the increase in yen, and significantly slower than the increase in the Chinese fiat unit, whatever it’s called. As such, the much heralded, coming drop in the dollar may be exaggerated.
If so, long term rates could stay low, as long as our inflation rate stays low, because FCB’s would keep buying Treasuries. This implies that the housing boom might continue to expand for a while–two or three years.
Of course, non of this is sustainable indefintely. Eventually, we might return to ugly rates of inflation, if the Fed gets “forced” into ballooning the monetary base, and the economy holds together long enough to inspire lenders and borrowers to binge on new debt. Then, of course, the dollar will head south, and long rates north.
In the meantime, however, I worry about ‘unplanned” deflationary pressures flowing from the eventual collapse of real estate values. If people pull in their financial horns in the midst of a crises, dominoes could tumble, no matter what the fed does with the monetary base.
Bill, I think part of the problem is that there’s already too much US paper floating around the US economy, and most US production has been poorly allocated due to the artificially low interest rate.
“what can China do with the American money? Buy more paper, buy American goods and services, invest in American businesses, or buy American real estate.”
Yes, and when China decides to spend that half-trillion dollars on US goods and services, a few things will happen:
1. Massive currency depreciation, so that Americans suddenly cannot afford all the cheap overseas goods they buy. In the meantime, the US economy cannot produce enough of these goods, so you get major production shortages, followed by…
2. Hyperinflation, fuelled by an influx of hundreds of billions of new dollars. Chinese demand for US goods, trying to get *something* for their dollars, will push the prices of basic goods beyond the means of many people.
3. In a 1%-interest regime followed by hyperinflation, there will be few if any good investments available, either to Chinese or Americans. The stock market is still overvalued, and when corporate profits start to plummet, well…
4. US and Chinese will try exchanging dollars for other currencies, looking for investments outside the country, fuelling hyperinflation any more. Forward-looking Chinese might gobble up US real estate once that market crashes, turning vast tracts of corporate America into a Chinese serfdom.
Just a few possibilities, anyway!
I know this is off topic. But I was wondering if someone could provide me with a definition of private property. Is it simply owned by the person that got there first? Is it owned when one person has built on it, or worked or developed the land?
Regards.
“One mystery surrounding the current situation is the near record low long-term interest rates with the 10-year government bond hovering at around 4%.”
What about the recognition that Greenspan doesn’t want a recession and hence won’t raise rates too quickly – and also that when he does raise them slightly things will start to unravel, causing him to stop raising rates. With short term rates staying low, the yield curve should flatten causing the 10 year note to appreciate in value even more and this lower interest rate causing the US economy to develop further capital misallocations.
Comments on this entry are closed.