The Economy: Bill Bonner, "Sticking With The Basics"

"Sticking With The Basics"

by Bill Bonner

"We are now in the early stages of a major credit contraction. This is not a pause in a credit expansion; it is a change of direction, a credit contraction with all that goes along with it – joblessness, bankruptcies, foreclosures, and so forth.

Bloomberg tells us that the numbers have already been revised – downward. “Worst recession since the Great Depression,” says its headline. It is the worst recession since the Great Depression because it’s not a recession at all; it’s a depression. And the government is doing its level best to make it a great one. The key to understanding a depression – or the downswing of the credit cycle – is that demand contracts. Consumers have less to spend. For a very simple reason: they already spent it.

Listen up, because this is important. When you borrow in order to consume, what you are really doing is consuming something today that you would have normally consumed in the future. You spend money you haven’t earned yet on something you’re not really ready to buy. You’ve heard the expression, ‘time is money.’ That’s why borrowing money is really borrowing time. Later, you have to make it up. You have pay off the debt. When you do, you take money out of current consumption; you’ve already consumed it!

This is what economists refer to as “demand destruction.” It’s what happens in a depression. People are replacing what they took from the future. They’re can’t consume because they’ve already spent their money in the last boom. Demand collapses.

We’ve seen that happen in the last two years. Savings rates went from zero to 7%. Sales have declined (the latest revisions show them off more than was previously thought.) Profits are shrinking.

This is, of course, a completely natural and necessary adjustment. You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand…with tax cuts…spending programs…low rates…easy credit…cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that…that would require a richer population with more money to spend. What they try to do is to move demand forward.

The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it…taking away demand that would normally show up two, three, four…ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.

Real demand increases only when real wages increase. Then, people have more purchasing power. Trying to increase demand by borrowing – or stealing – from the future is a scam at best. Even if it works now, it fails later."

- Bill Bonner, http://dailyreckoning.com/sticking-with-the-basics/

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