In financial newspapers, journals and online blogs, especially in the United States, there are many, many articles bemoaning the amount of debt in the US economy. They usually end with a conclusion such as “this cannot continue, the economy must collapse” and then they usually suggest that the reader should do something drastic to prepare for the inevitable — “sell stocks, buy Gold, store canned food, buy a rural property, get a gun, buy our newsletter, buy our books” (!) — or even a combination of all.
The DOOM and Gloom analysis often surrounds so-called government debt without ever pointing out that governments don’t borrow from banks, they issue bonds. So readers are often mislead into thinking that governments can easily “go broke”, get hit with hyper-inflation and see their currencies and their economies collapse. Thankfully, all of these events are extremely rare in history and they are due to clearly identified triggers, none of which are ever mentioned.
The whole phenomenon is called “Prepping” and the adherents are called “Preppers”. The Preppers are preparing for the “inevitable” collapse of the economy and the societal chaos to follow. They live in a state of perpetual panic while they stack. “Stacking” involves the storage of canned food, guns and ammo, clothing, water, fuel, precious metals in physical form and anything else they can think of including alcohol.
The American Preppers Network tells us that the 6 key elements to “stack” are — water, food, security, power, first aid and evacuation. On their website, they reference the Top 50 Survival Blogs on the Internet. Most of the scenarios involve the assumption of economic collapse and point to excessive debt as being the epicentre of instability.
Governments are immortal so their peculiar form of debt (Government Bonds) is unique because it is not bank debt — more on that later. So let’s look at the private debt situation in the US because BOOM sees that form of debt to be the most critical in financial and economic terms.
US PRIVATE DEBT SITUATION
In the 5 year period from 2003 to 2008, Total American Household Debt grew from around $ 7 Trillion to $ 13 Trillion. That is a 70 % increase in just 5 years. Note that figure — historically, a 70% increase in just 5 years is a very rapid increase in private debt for such a short period of time. Then the Global Financial Crisis hit due to bank frauds and banking crime of unprecedented proportions — most of which had occurred in that previous 5 year period.
After the Global Financial crisis in 2008, total US household debt fell from around $ 13 Trillion to $ 11 Trillion in the next 5 year period. Then it started to rise again and over the last 5 years up to 2019, it increased from $ 11 Trillion to $ 14 Trillion. That is an increase of 27 % in five years (way below 70%).
No matter how hard BOOM tries, that current rate of increase just does not induce panic. It seems to BOOM to be a slow and steady increase, not something that will destabilize the whole economy and result in a sudden collapse.
Also in that period, the annual GDP of the United States grew from around $ 17 Trillion to $ 21.5 Trillion — an increase of about 27 %. Coincidence?
So — let’s pause and think carefully — there has been a slow steady 27 % increase in the size of US GDP (total economic activity measured in dollars) while there has been a slow and steady 27% increase in the size of total US Household Debt. Shock, horror — is that the signal to panic? Is this excessive indebtedness? BOOM does not think so.
The source of BOOM’s numbers is the US Federal Reserve Consumer Credit Panel. It includes Mortgage Debt, Credit Card Debt, HE Revolving Debt (debt loaned against Home Equity), Auto Debt and Student Loans. The total amounts to about $ 100,000 per household. Surely that is cause for concern? Mmmmmm. Not if it generates an interest component of average 5% — that is equal to $ 5,000 of interest per household. In other words, about $ 100 per week — about 8 % of average household income. Again, BOOM can’t get to a panic over such a figure.
MORTGAGES ARE THE KEY
The bulk of Household debt involves mortgages — bank loans used to purchase homes — and bank loans that are tied to home equity. Those loans are about 70% of the total household debt. They are also the key component in the fresh new money supply for the economy. So it makes sense to watch the mortgage originations occurring in the US economy. At present both mortgage originations and mortgage refinancings are growing strongly in the US and that is happening during winter which is unusual. This is a sign of faith in the future and is a strong positive for the US economy going forward.
MORE POSITIVES IN THE US
What else is happening in the US economy that is a positive input? The US Federal Government Budget Deficit is growing strongly under Trump. This fuels increased US government spending. That also helps the economic performance but, because it is fueled by bond issuance and not by fresh new bank loans, it does not boost the supply of new money. Thus, it helps support the economy to some extent but deficit spending by governments is always limited in its “stimulatory” impact because the money supply is not affected.
And, finally, US companies are engaging in share buybacks aggressively. BOOM watches this phenomenon closely and there is no sign of wavering even during the so-called threat from the Coronavirus epidemic. This puts cash back into the hands of shareholders who wish to sell and they can then choose to invest that cash elsewhere (for example into better performing shares, bonds or property) or they can spend it on consumption items.
COMBINE ALL THREE
Let’s combine all aspects of the US economy that we have looked at. Total household debts and the economy as a whole have grown slowly and steadily in the last 5 years by 27% with no sign of an excess rate of growth. The Budget Deficit has doubled in size under Trump (nothing slow and steady about that). And there is no sign of the corporate share buyback phenomenon faltering.
If you consider all three acting in tandem, then there is no surprise that the US economy is growing and that their stock markets are running hot.
Panic, economic collapse, currency collapse, stacking, societal chaos may come sometime in the future but, at present, there appears to be no sign of those various disaster scenarios.
Like everyone, BOOM speculates about the future but BOOM is very wary of making predictions. The future is inherently uncertain with multiple complex interactions occurring between multiple variables. BOOM prefers to look closely at the past and the present (what we know for sure), always keeping a watchful eye on any significant economic, monetary or financial changes. At present, there appears to be a static situation in the US economy and in its financial markets.
So, let’s stop stacking and relax. Let’s not panic. We can worry if the dynamics change but, at present, that is not happening even with the global threat of the Coronavirus epidemic. Not to mention the permanent Tuberculosis epidemic which causes one Million deaths and 10 Million new cases per year. Oh — and then there is the common Influenza virus threat that comes every year and that killed 61,000 Americans last year from 800,000 hospitalizations.
FEAR IS NOW A PRODUCT
Fear is the product produced by mainstream media outlets. They produce fear day in, day out with no perspective given. They know that fear creates anxiety and that anxiety makes their customers more suggestible to their advertisements. It is important not to be swayed too much by the mainstream media or the DOOM and Gloomers, stacking in their basements. Keep a level head and read BOOM.
EMAIL: gerry [@] boomfinanceandeconomics.com
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HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR (but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
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