This week we saw big headlines touting the growth in spending by consumers on stuff. This is big news to the “mainstream” economists and drove the stock market higher. Prosperity, economic growth, they say, is beginning.
At the same time, employment has not begun to increase, new unemployment claims continue at high levels, the government keeps extending benefits for the unemployed, production has gone up a very small amount, and bank lending of all kinds has continued to decline.
Housing in an interesting sector. Last month’s housing purchases were significantly higher, much higher than expected. The increase in home purchases, of course, was trumpeted by the administration and its media cheerleaders as a great success. Ignored by them was that the tax credits for home buying that the administration had pushed through were set to expire soon, at the end of April, a few days from now. People were rushing to take advantage of the government giveaway (i.e., the government would take less of your money in taxes). April’s figures for home sales will look good, too. Just wait until after May. Reality will set in. Without artificial support, the housing market will tend back to its original course downward in terms of sales and prices. In the meantime, foreclosures are increasing.
So, why do they say that the economy is recovering?
One of the unquestioned tenants of mainstream economics is that consumer spending is a primary driver of an economy. If “consumers” are spending, then the economy will grow and wealth will increase. I put “consumers” in quotation marks because the mainstream economists disconnect the “consumer” from any kind of productive activity. A job, they reason, is merely the process by which a consumer receives his money to spend. That is why government jobs, subsidies, handouts, dole, public works, infrastructure construction, and government money projects ad nauseum are all equated with jobs in private, productive companies. It isn’t that anything is produced, it is that people have money to spend. They don’t think that government spending per se is important, just that it gets money into the hands of consumers, who are the motive power in our economy.
Ayn Rand, in “Equalitarianism and Inflation” published in the Ayn Rand Letter in June and July, 1974, offered to bring in savages from around the world to help out in the spending.
If asked, they might say that the increased demand will elicit more production. They will suggest that the increase will come from the manufacturer bringing on unused productive capacity. Bernanke, from the Fed, would say that when production has reached full capacity, we could see some prices begin to rise, but he will also, deep down, expect to see more capacity created, somehow. It is not clear to them. It isn’t real. Most important, it isn’t production that is important, but spending.
So, since consumers last month started spending more, the mainstream economists believe that the economy is recovering.
But, you ask: Where is this money coming from? What does it really mean?
I think that there are two sources for this upsurge in spending. First, it does look as if the economy is bottoming out, and people are a little relieved that the downward spiral is not continuing. That relief, plus the government and cheerleader hype, make people feel as if they do not need to keep a lid on their plans and personal spending. Things have worn out, things are out there beckoning to be bought, people miss their old lifestyle of buying, buying, buying. Off they go and spend some money. So, some of the increase in consumer spending is coming from people who had recently been paying off loans or saving, but are now putting money into the consumer market. This isn’t necessarily bad (nor good), but if these are productive people, their spending isn’t directly harmful. I don’t think that we have a means to tell if this is a large portion of the upsurge in spending.
The rest, and an important part of the upsurge in consumer spending, comes from non-productive people, and is therefore, harmful. This is money from all of the government programs, including, but not limited to: unemployment benefits, “shovel ready” programs, graft, handouts (individual or corporate), new government employees, corporate bailouts, and on and on and………. We have more dollars chasing a limited amount of goods, and prices will tend upward.
I saw a presentation by an inflation watch group that claimed some food prices had climbed over 50% recently. The price for oil is continuing upward, especially as the large developing countries actually develop for a change and new car sales continue rising there.
Boom-bust cycles are fed by credit expansion. There is no credit expansion right now. We are not going to see asset booms for a while. Someone said we have a boom in government. We do. The government is spending. To the extent that the money is made-up stuff, we have a direct feed into prices and they will rise. When the money funding the government comes from previously exported dollars (i.e., China buying Treasury Bonds), it is made-up money, and prices will rise. To the extent that the money comes from our own economy, it is savings that is being consumed rather than invested for wealth creation, and we will continue to stagnate. Neither is good. Back to the 70’s, back to stagflation. Since BO and his gang do not look at history, we could see price controls again. We could see the FBI back in corporate offices again. We will see more attacks on capitalism and more destruction of our way of life, of our freedom.
How MoSCoW Can Fix America’s Spending Problem - In the past several years, I have been working on managing a multitude of requirements within a government project so that the objective was achieved on ti...
1 year ago