Re: What is the endgame for a spendthrift nation?

"Andy" <[EMAIL PROTECTED]> wrote in message
news:[EMAIL PROTECTED]
> In the 1 Dec 2003 NY Times there was an article title "Why Americans
> Must Keep Spending; "
> http://www.nytimes.com/2003/12/01/business/01econ.html
>
> The article describes how the depth of recent recession was moderated
> by growth in consumer spending during the recession, and how the
> recent economic recovery has been financed by even greater growth in
> consumer spending.
>
> The article also says that this economy saving growth in consumer
> spending has been financed *not* by increased earnings but instead by:
>  (1) people taking on more debt,
>  (2) and withdrawing equity from their homes by means of refinancings,
> and
>  (3) tax cuts.
>
> The article asserts that consumers must keep up this spending growth
> for the economy to keep growing.
>
> Given that tax cuts are just another form of borrowing (since the
> budget is in deficit) this means that at present our economic health
> depends on ever increasing borrowing to finance consumer spending.
> What the article doesn't address is what the endgame is for this
> scenario.  It seems obvious to me, though none of the experts are
> addressing it, that a nation cannot successfully depend on increasing
> consumer debt forever; at some point the minimum payments will be so
> high that the consumers can't borrow any more.  Then the borrowing
> will level off, and that will cause consumer spending to level off
> and/or drop, and then the economy will go into a depression.  Or am I
> missing something?
>
> Andy

Yes, and so has almost everyone else.

It's not really about consumer spending, tax cuts, or the other political
rhetoric mostly hiding the ball.

When the U.S. government prints money, how do you suppose it gets it into
circulation? (Hint: It doesn't just spend it and reduce the national debt).

It lends it!

Well, that doesn't seem so bad. Even if it lends it at 1%, it has to be paid
back with interest, so we won't get wild inflations from the money printing,
right?

Um, wrong. Money circulates. $1. could circulate 8 times in a year,
resulting in 8x the sales, 8x the profits, more credit, etc. etc.  How many
times it circulates isn't the point. The point is it circulates many times,
which economists call the multiplier effect.

In other words, the government, lending so much so cheaply is REALLY REALLY
REALLY printing alot of money. Add that to the trade deficit, huge borrowing
for national debt, huge individual borrowing.

It all points to a coming wild inflation that will make Jimmy Carter's
inflation look peanutty nice in comparison.

THEN once that sinks in (the inflation follows high economic growth during
which everyone feels great, sound familiar?) you can worry about Depression,
foreclosures, bankruptcies, unemployment, etc. etc.