By MN Gordon
American consumers are not only feeling good. They are feeling great. They are borrowing money – and spending it – like tomorrow will never come.
After an extended period of indulging in excessive moderation (left), the US consumer makes his innermost wishes known (right). [PT]
On Monday the Federal Reserve released its latest report of consumer credit outstanding. According to the Fed’s bean counters, U.S. consumers racked up $28 billion in new credit card debt and in new student, auto, and other non-mortgage loans in November. This amounted to an 8.8 percent increase in consumer borrowing. It also ran total outstanding consumer debt up to $3.83 trillion.
US non-mortgage consumer debt – this exercise in admirable restraint seems to have served as a template for corporations and the government. [PT] – click to enlarge.
Perhaps this consumer spending binge will finally propel price inflation, as measured by the personal consumption expenditure (PCE) deflator, up to the Fed’s elusive 2 percent target. Academic economists and central planners consider 2 percent price inflation to be the sweet spot for attaining economic heaven on earth. We have some reservations.
Controlled inflation, or what is sometimes called financial repression, is what the Fed is after. Because controlled inflation is the grease that keeps the gears of the debt based monetary system turning. You see, through controlled inflation, and the subsequent slow erosion of debt burdens, borrowers can make good on their debts with dollars of diminished value.
And, of course, the biggest debtor of all is the federal government. Controlled inflation benefits Washington more than anyone else. The government can borrow massive amounts of money and inflate its debts away. Yet this isn’t without consequences…
Binges wherever one looks… [PT]
Disaster in the Making
Remember, a Treasury bill – a debt based asset – does not represent goods produced. It is merely a claim on future production. The interest that a Treasury bill yields is paid with taxes drawn from the labors of citizens.
Creditors are certainly aware of the inflationary character of government deficits. They know that if the Fed loses its handle on this controlled inflation scheme, and yields abruptly spike upward, their Treasury holdings will rapidly depreciate in value.
Nonetheless, creditors prefer controlled inflation with the risk of uncontrolled inflation to the alternative of deflation. Because in a debt based fiat money system, deflation results in unpaid debts and outright defaults. This is why ever increasing levels of debt are needed – or the financial system breaks down.
As an aside, in a stable money system, like the international gold standard of the late 19th century, in which economic growth is financed through savings and accumulated capital as opposed to debt, deflation is a welcome byproduct of capitalism. Cheaper prices for goods and services benefit consumers without the risk of cascading defaults.
So, will the Fed succeed in attaining the miracle of 2 percent controlled inflation? We don’t know, and we’d much prefer a stable money system. But we do know these sorts of schemes rarely …read more
Source:: Acting Man