Why We Can Not Purchase Our Way Out Of Debt

Howard Liberman Fort Belvoir, Virginia. Soldier using a barbed wire anchor spike August 1942 

The Automatic Earth

Last week, there was a discussion in our comments section about the financial “crunch”, the big kahuna, and how it still has not happened despite our insisting it is inevitable, with people saying things like: ‘but the stock markets are way up!’, and ‘in my area home prices are up 30%’. As much as I understand the sentiments, at the same time I don’t really. Certainly for people who read The Automatic Earth, I would have thought it would be clearer what is going on “out there”. I have certainly written more articles than I care to remember about what goes on. Debt is what goes on.

Because in order to understand what really goes on in the world of finance, and the economy at large, today, you need to know only one word: debt (aka credit). And you then ask yourself with everything you read: what about the debt? It’s a question largely absent from the media, other than in yet another Mexican standoff at the US Congress about the debt ceiling.

But you don’t need to be an Einstein to figure out why the stock markets set records, or why housing prices in the US and UK are rising, even if the media prefer to ignore why they do. All you need is that one question: what about the debt? Once you start looking at things with that question always in the back of your mind, the picture becomes – literally – painfully clear.

As I put it in that comment thread:

“As for that crunch, being skeptical of a crunch is what we do, all the time, day after day after day. But all I see is a crunch that grows in size day by day, because people let themselves get fooled into thinking that not only can debt be paid off with more debt, but that they will actually profit from this being executed in their name, and with their money. Look, the S&P breaks another record! Well, you certainly earned that look, because you’re paying for it.

If people still think we were wrong, and are wrong, about that crunch, let’s talk, but they need something better to bring to the table than S&P records or home prices. Because we can’t have that conversation without looking at debt levels. And I think that’s where the turning point still is, whether in conversations or in real life. You think things are looking up? Okidoke, so what happened to the debt that caused the 2007/8 crisis? Well, personal debt went down a tad (foreclosures), though plastic is all the rage again, bank debt (by far the largest) has been hidden behind a too big to fail wall, and federal debt is on its way out of the ballpark, going going but by no means gone.

But hey, everything seems normal right? Well, unless you’re in Greece, or Italy, or Spain, or Detroit, or you’re in that fast growing American army that just lost your foodstamps and your unemployment benefits. So is it possible that maybe things seem normal for you because they no longer do for other people? If it looks like what it was before, that must be real, right?, that couldn’t be an temporary illusion bought with debt, like getting a new credit card and using it to pay the mortgage and the kids’ school fees and dentist bills till it’s maxed out after a few weeks or months? How many people do you think went routes just like that? And where are they now?

Does anyone think that the debt pays off itself? And even if you do, please note that it hasn’t so far: it’s only grown. How do you think that will end? How could it possibly end?”

Let’s say there are three important kinds of debt: household, financial and federal (national) government. That is, if you allow me to skip over lower level government debt and non-financial business debt for now. Which shouldn’t be ignored, I know, we’ll see a surge in bankruptcies in municipalities and businesses, but let’s look at the three “big ones” today.

Household debt has gone down a little, despite resurgent plastic and soaring student loans. People have a lot less, homes have lost a lot of value, foreclosures have been executed, and what new jobs there are pay much less than those that existed before the crisis (not that I would argue the crisis ever ended, but many do). 

continue article at The Automatic Earth:

http://www.theautomaticearth.com/can-purchase-growth/