Confidence and Delusion
by, December 30th, 2011 at 11:46 PM (642 Views)
Many Americans are asking themselves why our economy is failing. They want to understand why the economy of the greatest democracy in the modern world is sinking like a lead brick. The answers, in the end, come down to the very human failings of greed, sloth, neglect, and the list goes on. These are the basic reasons for the failure of every human endeavor in the long run, but if you want to understand some of the mechanics of our current situation and what I think could be done to reverse their effects then read on. I believe that the situation can be broken down into three main parts; debt, risk, and taxation/government. In this post I will cover debt.
To begin with, we need to look at the basics of debt that most people should know, but, which I think many people pay little attention to. Debt is a means to purchase something now without actually having the money to pay for it. The purchase price along with an agreed upon interest for the privilege of using the product now becomes debt when you promise to pay for the item in installments or at a later time. If the debt is not paid off, then the person must return the product they purchased or face penalties until the debt is canceled out. If a debt is not paid off even after the penalties have been added to the debt and the product purchased is no longer worth the original purchase price, then the selling company must mark the itemís sell as a lose up to and including any interest promised and/or penalties assessed. In other words, the company is out the money spent to make the product along with the profit it would gain from the purchase price and the interest from the financing.
Another aspect of debt is the use of third parties such as banks or other institutions that make financing available. For example, a bank may loan a person money to purchase a car and act as the collector for the incurred debt. In this situation, the company selling the product actually gets paid while the bank takes the risk of not being repaid with the same ramifications for failure to collect on the debt. Unfortunately, with banks, the funds they use to make loans come from the deposits of their customers. If the banks make too many uncollectable loans, they will not be able to give their customers money back. The banks can and do repossess products purchased with their money, but at additional costs to themselves along with a diminished resale value.
One of the first reasons for creating a system of debt was the purchasing of a home. Because of the large cost involved with buying a home, many people were not able to afford to live in adequate housing. In addition, those who built houses were restrained in their ability to sell their product because few could pay for them until after many years of saving. By loaning customers money to buy the home as long as it was paid back with interest, home builders could sell more homes. The success of this idea became the model by which are economy is now based.
The problem arises, like so many do, from the over use of a good thing. The use of debt became like candy to our country. We have now eaten so much that we have thrown up all over ourselves and gotten it on the rest of the world as well. Companies fell in love with the idea because they could by more materials to sell more products. Consumers loved the concept because they could get more stuff. The banks loved the idea because they could charge interest and fees to make profit. They all forgot one main thing. If people and companies canít pay back the debt, the banks donít make money and canít loan more out. Unfortunately, they just decided to press on and even expanded the program.
This created an economy based on sales through debt. Our economy is solely based on volume sales and falters every time circumstances cause a reduction in sales. There are many things that can cause a reduction in sales, but one that is becoming harder and harder to ignore is our confidence in our banking system to continue supporting the economy. In truth, our economy is so connected with our confidence in our banking system that whenever we actually notice the cracks, the economy stumbles. We are standing on top of a house of card supported by a dollar bill. I have watched shows that put our debt load at $25 dollars for every real dollar. In other words, for every dollar a U.S. Citizen makes, they owe another $25 dollars in debt and my guess is that the load has increased since then. In a sense, we are a bankrupt country that refuses to believe it is and talks others into continuing to give us more money.
What the average citizen refuses to understand is that debt and the economy built upon debt pervades our entire country. Tea Party citizens say get rid of Medicare and Social Security to cut the government debt. Well, what happens when large portions of the country stop going to doctors as often because they canít afford them or donít buy prescriptions regularly. Doctors and pharmaceutical companies do not make enough money, which means they cannot support staff or pay dividends. Now the people that depended on the doctors and pharmaceutical companies cannot purchase as much. Get rid of social security and the problem expands exponentially. Ask any grocery or discount store manager how important social security and WIC payments are to their bottom line. If they no longer can count on the monthly surge in sales from these programs, they will have to let people go. Think of a snow ball rolling downhill building up mass and speed. Now stand in front of it.
Next, think about what would happen if we, as a country, decided to suddenly stop lending to people until they actually paid their bills. For one, they could not pay their bills because they have only one real dollar and twenty five dollars of consumed or devalued assets. For another, they would not be able to buy more products since they canít afford to pay for what they already have. Guess what happens now. Businesses are stuck with product they canít sell or pay for themselves, so they have to make cuts in their expenses to try and balance their books. The easiest expense to cut is their work force, which means layoffs, more people that canít buy product. Wow, we are going to be creamed by another twenty five ton snowball.
Finally, we come to the basic cause, excluding the twists of corruption, for the banking meltdown in 2008. Terrible mistakes and excessive greed made the flaws in our debt based economy too glaring to be ignored anymore and consumers, namely Wall Street investors, panicked and started pulling their money out. The problem was that the lenders did not actually have the money. They had some real money and a whole lot of promises of payment that could not easily be converted into real money. This is where confidence, as stated by some government officials, comes into play. Extraordinary measures had to be taken to distract us from the fact that there was not enough money for banks to pay their obligations. Our countryís solution was to restore confidence in our system by pumping large amounts of cash into it, cash that we did not have. In other words, more debt bought from China. We used more debt to support the debt we already had. Too big to fail becomes too much bigger to fail but the system limps on.
The most visible lightning rod for citizensí anger was the TARP program passed by congress; however, the program was a drop in the bucket for what was actually done to prop up our economy. Facts have come out that in addition to the 770 billion dollars given to the banks, the Federal Reserve also loaned banks 11 trillion dollars at very low interest rates (0.001%). Try getting a loan like that at your bank. I have actually had arguments with people when I told them that the Federal Reserve just printed money to make this possible. They basically made money like a counterfeiter would, without actual assets to back it with, which devalues the real worth of the money.