Consumer confidence took a significant downturn in October. The Conference Board reported a consumer sentiment index of 39.8, marking its lowest level since March 2009. To contextualize, in a thriving economy, consumer confidence typically sits at a level of 90 or higher.
With consumer spending representing approximately 70 percent of the U.S. economy, this sentiment is a crucial indicator. When consumers lack confidence in economic stability or their financial prospects, they are less inclined to make purchases.
It’s evident that consumers are facing a bleak outlook. The stock market has stagnated for over a decade, many homeowners are struggling with underwater mortgages, and median incomes for the middle class have plunged by 7 percent in the past ten years. The Conference Board highlights that currently, twice as many individuals anticipate pay cuts in the next six months as those expecting raises. Furthermore, recent graduates are grappling with high unemployment rates.
For instance, the Bureau of Labor Statistics indicates that the unemployment rate for college graduates under 25 is nearly 14 percent. Many from the Class of 2009 entered the workforce with an average debt burden of $24,000 in student loans, raising concerns that a significant number of these loans may default. In response, President Obama unveiled a plan to limit federal student loan repayments to 10 percent of discretionary income.
This proposed solution, however, resembles a band-aid on a severe wound. The debt has already been incurred, and no strategy will erase it.
It’s clear that the economy is in disarray…
The True Depths of Inflation
At Economic Prism, we attribute the malaise afflicting the economy to total debt saturation. The economy is overwhelmed by an unsustainable debt load. While growth could theoretically alleviate debt levels, the sheer magnitude of current liabilities is stifling the economy’s growth potential.
Alternatively, the debt may be repudiated, either overtly through default or subtly through inflation. Yet, no government official has the courage to admit that the country has overspent and is essentially defaulting on its obligations. Thus, inflation emerges as the likely outcome.
This is evidenced by government actions since the financial crisis of 2008. It is apparent that the government is pursuing implicit debt repudiation via inflation. The challenge with inflation, aside from its nature as a form of theft, is the unpredictability of its reach once unleashed. Moreover, there may not be sufficient political will to rein it in once it escalates.
When the French Revolutionary Government resorted to inflating their currency at the close of the 18th century, it was an earnest attempt to navigate difficult economic waters. However, once inflation commenced, it spiraled out of control.
Initially, new money issuance appeared to yield slight improvements, yet conditions continually worsened. This paradoxically spurred demands for further money creation, ultimately leading to a decline that adversely affected wage earners, laborers, and savers.
Creating Our Unique Brand of Misery
The contemporary financial system is far more convoluted than its historical counterpart. Today, new money is generated through debt-based digital credits rather than traditional currency printing. Furthermore, the ability of buyers to acquire government debt has seemed virtually limitless, although this may soon change…
As Bud Conrad of Casey Research states, “Foreign central banks buy U.S. Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody.”
“Without these central banks purchasing our debt, the U.S. federal government would need to explore alternative funding sources, leading to potentially higher interest rates. Reviewing monthly data reveals a stark shift from $500 billion in purchases to $1 trillion in sales. If this selling trend continues, interest rates are likely to rise – unless counteracted by the Fed’s aggressive policies,” he notes.
We all know where the Fed acquires the funds to buy government debt: they create it and then lend it to the government, adding interest. While these actions may be borne out of good intentions, ceasing such purchases would mean higher borrowing costs, reduced spending, economic stagnation, and increased unemployment. Regrettably, this charade has passed the point of no return.
Although it remains uncertain if the repercussions of current massive inflationary policies will manifest suddenly, it’s clear that the financial maneuvering executed by the current governance will result in a distinct form of suffering.
In the end, protestors, similar to those at Occupy Wall Street, may find themselves facing real stakes. Centuries ago in France, the guillotine served as the method of choice for dealing with societal unrest.
Sincerely,
MN Gordon
for Economic Prism
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