Debt
5:16 am
Thu February 27, 2014

Commentary: The Economy Is Starting To Look A Lot Like 2007

There is a discouraging circularity to folly. The tendency to repeat mistakes, I suspect, is born of forgetfulness. We usually remember the catastrophic failure itself, but often overlook the seemingly minor missteps that led to calamity.

Those who cannot remember the past are doomed to repeat it. --George Santayana

The ability to forget unpleasant realities is probably a necessary component of human progress. After all, the first guy to fashion a spear out of materials on hand and then venture into the wilderness to hunt mastodon had to be an optimist. And optimism is essentially unshakable hope for the future — which is, when you think about it, a curious attribute for beings who understand they’re mortal.

Metaphysical speculation aside, my point here is that folly becomes a habit when we forget the behaviors that led to it in the first place. A recent dispatch from Bloomberg News provides a textbook example of what I’m talking about.

Back to borrowing

The story reports that household borrowing has reached a six-year high. Consumer debt rose by about $241 billion last quarter according to the Federal Reserve. That represents a 2.1 percent gain over the previous period — the largest increase since the third quarter of 2007, bringing total household indebtedness to a whopping $11.52 trillion.

Believe it or not, those rather ominous sounding statistics are greeted as good 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 former Treasury Department economist who is currently a professor at the University of Oregon-Eugene.

Duy’s analysis is bolstered by the facts: Consumer spending fuelled a 3.2 economic growth rate during the fourth quarter of 2013. At long last, the economy appears to be emerging from the doldrums as people start to spend. What’s not to like?  For pessimists like me, there’s plenty…

Sound familiar?

Recall that the last time borrowing reached this level was the third quarter of 2007 — a year before a cataclysmic economic collapse that prompted then-President George W. Bush to remark of the international banking system, “This sucker could go down.” And what caused that crisis? Bad credit.

house leaning against dollar
Credit sxc.hu

Just who the villains were in the sad saga depends on your ideological perspective. Conservatives blame misguided governmental policies that encouraged or forced bankers to give mortgages to un-creditworthy applicants in the effort to expand home ownership. Liberals fault predatory lenders who exploited the vulnerable.

Both explanations are probably correct.

The fundamental problem here is the need to live beyond one’s means. In the wake of the ’08 collapse, consumers hunkered down to ride out the storm. They paid down debt, deferred big-ticket purchases and restricted discretionary spending. 

Widespread austerity made sense for household budgets but not for the economy at large. Car dealers, department stores, restaurants and theaters suffered mightily, thus prolonging the general misery. Individual frugality brought about collective recession.

Economic bulimia

Now, like dieters who can’t bear to look at another plate of cottage cheese, consumers have reverted to their old habits.  Unfortunately, most of them still don’t make enough money to purchase at the levels required to sustain economic growth. 

For the short term, they borrow. When the credit cards are again maxed out, they have to stop spending and recession returns. We seem to be suffering from a kind of economic bulimia — locked into a lethal splurge-then-purge cycle on a fiscal roller-coaster headed nowhere.

Add all the individual households together and you have the national economy. In a moment of lucidity, Sen. Rand Paul, R-Ky., recently pointed out that the federal government is presently borrowing a million dollars a minute to pay its bills.

At first blush, his observation struck me as the kind campaign rhetoric you’d expect from a politician trying to gin up a presidential bid. But do the math and you’ll discover that’s what an annual deficit of just over a half of trillion dollars looks like. To describe the situation as precarious is to indulge in understatement — it’s downright scary.

While there is no facile explanation for our complex financial woes, the glaring problem of wage stagnation merits consideration. About 70 percent of economic activity is comprised of consumer spending. For this model to work, somebody has to have money to spend.

Globalization has allowed manufacturers to use cheap foreign labor. Indeed, China’s international ascendancy was brought to you by the miracle of what is almost slave labor. Low wages keep the cost of goods down but they also destroy the consumer base the manufacturers rely upon to survive. In effect, the snake is eating its tail.

Vladimir Lenin remarked to the effect that a capitalist will sell you the rope to hang him if he can do so at a profit.  We now know that notion is wrong. Turns out, if the capitalist can make the rope cheaply enough, he’ll hang himself with it.

Related Program