Posted on 03/13/2009 6:36:19 PM PDT by sickoflibs
This week, with his pronouncement that “credit is the lifeblood of a healthy economy,” President Obama reiterated what has been one of his most common themes in diagnosing our economic problem. The president has relied on this bedrock belief to propose policies that place the restoration of credit as the highest priority. However, despite his seemingly earnest intentions, the president and his economic advisors have misdiagnosed the ailment. Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.
What everyone seems to have forgotten at this point is that credit does not come from thin air. Even in a system in which bank reserves are leveraged many times, someone has to put savings in a bank for the bank to turn around and make a loan. As a result, the bedrock is the savings, which allows for the credit to flow. Credit extended without adequate savings inevitably leads an economy into disaster.
The primary mechanism that has injected credit where it does not belong is the massive credit card industry that has developed in the United States over the last generation. The ease with which these cards may be obtained and the degree to which Americans now rely on them for routine purchases has created a culture of credit that simply has no precedent in a healthy economy. Until this culture has been reformed, America's fight to restore economic vitality will be a lost cause.
However, this week a much discussed opinion piece in the Wall Street Journal by top banking analyst Meredith Whitney, indicated that many Americans besides the president are still looking toward credit as the means of economic salvation. In her piece, Ms. Whitney writes,
“...Undeniably, consumers look at their unused credit balances as a “what if” reserve. “What if” my kid needs braces? “What if” my dog gets sick? “What if” I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.”
In order to keep the economy functioning, Ms. Whitney asks the credit card providers and the federal government to keep credit lines open, so that millions of Americans can keep on spending. However, while such actions would certainly keep our phony economy propped up a while longer, it would further weaken the very foundation upon which a real economy will eventually have to be rebuilt.
Without a doubt, Americans, and all other people for that matter, benefit from having access to “rainy day money.” But Americans should be saving for a rainy day, not adopting the attitude that if it rains I'll whip out my credit card. If Americans need to pay for a suddenly ill dog, to straighten their kid's teeth, or to pull them through a period of unemployment, they should save some of their present earnings.
But saving money requires a reduction in spending, and that is something that modern economists, within and without the Administration, cannot abide. A drop in spending will create a sharper contraction in our economy - which is now comprised of 70% consumer spending. But this is no reason to discourage the process. The option to go into debt in the event of an emergency is no substitute for building personal savings for such events. Not only does such a strategy jeopardize the solvency of individuals or families when they are at their most vulnerable, but it deprives society of badly needed savings.
Currently, with so many financially strapped Americans looking to draw on their credit lines, the fallacy of this ‘savings substitute’ is easily revealed. With lenders’ capital depleted, and falling home prices, and rising unemployment putting borrowers at greater risk of default, credit is naturally harder to come by. Had only a small percentage of borrowers needed to access their credit card “rainy day funds” there would have been no credit crisis. But with a deluge drenching so many at once, there was simply not enough credit umbrellas to go around. Had Americans actually been saving money instead, everyone would have his own umbrella and would not now be looking to borrow someone else’s.
Most importantly, as savers bank their earnings into “rainy day funds,” in addition to earning interest, those savings are available to businesses to make capital investments, produce goods and services, and provide employment. Without access to those savings, such investments cannot be made, and society is worse off as a result.
Lastly, savings can always be relied upon whereas credit is ephemeral. Remarks this week from the Chinese premier Wen Jiabao should serve notice to all Americans that the day will soon come when the Chinese stop lending us their umbrellas. When that happens, the average American will be soaked to the bone.
If you realize both parties in Washington think our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut a few taxes and spend a few trillion and jump start the economy, and get our lost money back, this list is not for you.
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>> This week, [Obama] with his pronouncement that “credit is the lifeblood of a healthy economy,”
Well, you gotta admit, with $1.3 trillion on his gubmin credit card, the bastid certainly practices what he preaches.
Your Schiff fix
"Lastly, savings can always be relied upon whereas credit is ephemeral. Remarks this week from the Chinese premier Wen Jiabao should serve notice to all Americans that the day will soon come when the Chinese stop lending us their umbrellas. When that happens, the average American will be soaked to the bone."
Spot on! And Bush and his advisors before him.
The point being missed by nearly everyone is that there IS NO PLAN that will bring us back to the days of unsustainable hyper-consumption based on massive consumer debt and fantasy 'profit' off of tricky 'financial instruments'.
Nor should there be.
They are measuring economic 'recovery' against a standard that was never sustainable in the first place.
bump de bump.
Wen Jiabao is blowing smoke. Where else are the Chinese going to invest their surplus? Our economy may be doing poorly but it is still the best game in town. Witness the flood of funds, form all over the world into treasury instruments that are effectively paying 0%. Why would hey do it? Because it is better (much better) than the next best alternative.
I don't see how you get people spending in the near term. Most folks have lost a substantial portion of their 401K's and are confronted with the reality that they might not have enough to retire. I don't see these people going on a spending spree.
I think savings will go up and debt will get paid off quicker.
This is all bull. The way to having a healthy personal balance sheet is to get a thug to buy a house for you. As an example, Tony Rezko bankrolled The Messiah’s house and now the One is doing real fine. Everyone should be issued their own Rezko - skip the other stimulus package. Just give me a Rezko.
http://www.politico.com/news/stories/0309/19981.html
"And he spoke of a day beyond the current crisis, when he would try to create a “post-bubble” economic model, one that doesn’t rely for growth on “just on an overheating housing market, or people maxing out their credit cards. Those days are over. What we need to do is go back to fundamentals.”
He might just be talking smack, but it says something about where we are culturally that it's being talked about by our president. His solutions may be incorrect, but he's got the disease identified.
At least until it is stolen without the safe even being opened by the Federal Reserve and Treasury printing way too much money. Invest in a wheelbarrow now while you can afford it.
unsustainable hyper-consumption based on massive consumer debt........
That is gone for years and maybe a generation or two. There are attempts to re-capture that era even in part. It will fail
The only way he’d do that is if Obama suddenly became a free-marketer..a lazzie faire in his economic thinking a true Adam Smith, Frederick Hayek, or Ludwig Von Mises Austrian..I would welcome this, but I doubt..
The reason they have that surplus is mercantilism. They built up their manufacturing (and destroyed ours) by both lowering their yuan and lending us money. There is synergy between our government needing to finance the deficit and the trade deficit. The money goes from American credit cards to Chinese merchants to the Chinese government to the American government. There is also truth to the notion of no better alternatives, but the loop was a bigger factor.
The current bubble in Treasuries is due mostly to the Fed driving rates lower. That raised the value of existing treasuries at higher rates. Foreigners simply bought the treasuries and waited for the value to go up, a no-brainer. It ends, more or less at the zero bound which is where we are at. The Fed has kept the game going a bit by creating artificial demand, like giving 300B in treasuries to Citibank which has to hang onto them. But this bubble will end and be replaced with the FRN bubble.
Maybe, but his ‘stimulus’ is based on getting the consumer spending again.
That's different than the Bush approach, which was to cut gubmint checks with money they didn't have, and tell us to go out and spend it. I spend the last two stimulus checks I got on the black market.
If you think this economy can sustain itself with the spending programs,not without counting the Bush programs,but just on the Obama programs,someone is living in a dream world.We spend more than we make,we count on the government to make up the shortfall when things go south.And guess what sometime this year or maybe next,all our foreign buyers of our debt will go bye bye,syonara,adios,hasta la vista.Then we will be screwed and all the fancy talk out of our elected officials will be exposed as nothing but hot air and a worthless currency.
First... I like Schiff. Second, Schiff seems to have forgotten that his example is Old School. In a closed economy like the USA of the 1900s, savings = investment (bank loans). Now... Savings come from African dictators and oil sheiks into Swiss banks as deposits then the deposit money was used to buy crappola CDO trash from Bear, Lehman, Morgan, et. al. and this created an ocean of foreign "savings" that became American consumption.
American savings rates were almost zero but global savings rates were rather high. So, forcing American savings rates up will have only a marginal effect in increasing Investment.
I agree that Americans need to save more and spend less but this will depress aggregate demand and keep the economy flat until savings rates stabilize at some equilibrium and spending returns.
By the way, I waited over two hours for a table at my favorite restaurant tonight. The recession is apparently over...
I actually woke up thinking about this parodox. We are encouraged to spend in order to help the economy. We are encouraged to save so that banks can use our money to make loans that help the economy. What should I do?
Any bankers, economists or money people out there have any words of wisdom on this paradox?
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