Recently it was reported that bank loans declined at a record pace
in the third quarter of 2009. We’ve got to get banks to start loaning
again, they said. That is the key to recovery. An economist noted
that GDP is the money supply multiplied by velocity. Velocity is
down. We’ve got to increase velocity, he said. That’s the key to
economic recovery. Another plea commonly heard is that we’ve got to get
consumers spending again.
These proposed remedies all have one thing in common: they put
emphasis on statistics rather than addressing the fundamental imbalances in the
economy. There is an underlying reason that banks aren’t making loans, and
there is an underlying reason why consumers aren’t spending. For the
government to ignore those reasons while it schemes to stimulate banks to loan
(or people to spend or businesses to hire) does more harm than good and may
even increase the imbalances that caused the current recession.
The cash for clunkers program encouraged people to buy cars, and
many of those people acquired auto loans along with their new cars. Thus,
consumers are even more in debt than before, and it will take longer to dig
out. A tax cut or spending stimulus financed by funds borrowed from abroad
may have a minor short-term effect on the economy, but it puts the nation
deeper in debt as we face the literally unbearable burden of Social Security
and Medicare for baby boomers.
We use statistics to measure the state of the economy. GDP is
a measure of economic output. The unemployment rate is a measure of
unemployment. Consumer spending, consumer confidence, national income,
etc. are all measures of various aspects of the economy. Theoretically, a
GDP that is higher is better than a GDP that is lower.
But if we target government programs or stimuli to move the
statistic itself, then we fail. In 2001 the Fed reduced interest rates to
encourage consumer spending. Consumers were able to get car loans with 0%
interest. Criteria for qualifying for a mortgage were relaxed. People
who otherwise couldn’t afford a home could get a mortgage. Rather than tax
people for increased military and Medicare spending, we borrowed from abroad.
These government stimuli did increase spending and they did
increase GDP in the short term. But they created an imbalance, also known
as a hole or a bubble. How much more debt can consumers accumulate before
they collapse? How much more debt can the federal government accumulate before
it becomes too burdensome?
The problem causing the current recession is that many consumers
have already reached their limits. They couldn’t increase spending anymore
even if they wanted to. No government stimulus is going to resolve this
problem.
We are in deep doo doo right now. Taking personal debt, business debt and obligations and government debt and obligations, and we are in deep doo-doo. It is going to take years to dig us out of this pile of debt. We can do it if we try. We have to start.
