In recent times, U.S. consumers have returned to their familiar habits of borrowing and spending. After a six-year pause, the appetite for debt has resurfaced, reflecting a notable trend in consumer behavior.
According to data from the Federal Reserve Bank of New York, consumer debt in the United States surged in the fourth quarter of 2013 — the fastest increase in six years. As Bloomberg reported, “Household debt rose by 2.1 percent, or $241 billion, to $11.52 trillion,” marking the largest gain since the third quarter of 2007. This uptick in borrowing was primarily driven by purchases of homes, cars, and investments in education.
Many economists greeted this news with optimism. Tim Duy, an economics professor at the University of Oregon and a former U.S. Treasury economist, remarked, “Signs that consumers are starting to releverage and take on more debt are consistent with the notion that we are turning a corner in the recovery.” This consumption surge significantly contributed to a 3.2 percent growth rate in the fourth-quarter GDP.
However, one must question whether increasing household debt should be met with such enthusiasm. From our vantage point, the real concern lies in what this borrowed growth means for the future. If economic expansion is fueled by debt, it merely pushes the responsibility for repayment down the road, inevitably impacting future wealth.
Hindering Productive Commerce
Despite various opinions circulating in the economic community, the prevailing thoughts often baffle those who seek clarity. Consider the latest comments from Federal Reserve officials: “Three Federal Reserve officials stated on Wednesday that they believe the U.S. economy is gaining momentum, despite a recent slowdown due to severe weather, hence allowing the central bank to move forward with plans to reduce its extensive bond-buying stimulus this year.”
What remains puzzling is the lack of inquiry from these officials regarding the initial rationale behind bond purchases. Have these actions truly benefited the economy? After five years of quantitative easing (QE), the advantages seem elusive. On the contrary, the approach has stripped away savings from three generations and forced fixed-income retirees to struggle with minuscule interest rates, such as the shockingly low 0.06 percent from Bank of America’s 12-month Certificates of Deposit.
Ultimately, what meaningful contributions can the Federal Reserve make to improve the economy? The institution does not produce or innovate; it merely alters the price of money and credit, often hindering productive economic activity.
Total Abandonment of the Rules of Common Sense
As Steve Forbes pointed out in the February 10 issue of Forbes magazine, “Vibrant economies, not central banks, create real money,” emphasizing that true wealth arises when tax rates are low, money is stable, and regulations are sensible.
Reflecting on the Fed’s monetary policies unveils a landscape of unnecessary and harmful consequences that continue to afflict the economy. The ramifications of these decisions will resonate for years, enabling the federal government to accumulate massive debt and impose hidden inflation taxes while undermining the financial autonomy of its citizens. This environment has facilitated the expansion of unsustainable promises regarding Social Security, Medicare, and Obamacare, which would not have been possible without the Fed’s meddling in credit markets.
Clearly, something has gone fundamentally awry. This situation stems from a drastic departure from common-sense principles in the realms of finance and credit. Traditional standards and rational thinking have yielded to misguided economic theories and unscrupulous political maneuvers.
The vanity of their actions is indeed astonishing…
Upon Janet Yellen’s confirmation as Fed Chair, President Obama stated, with unwavering seriousness, that she would “stand up for American workers, protect consumers, foster the stability of the financial system, and help keep our economy growing for years to come.”
Is there anything more to add?
Sincerely,
MN Gordon
for Economic Prism
Return from Total Abandonment of the Rules of Common Sense to Economic Prism
