"A Race of Morons"
Oblivious to the rising tide of debt, deficits and defaults,
mankind stumbles toward disaster..
by Bill Bonner
"A man who takes what is’n his’n.
Gives it back or goes to pris’n."
~ Daniel Drew
Poitou, France - "We have an old friend. One of the smartest men we’ve ever met. But he’s very down on his luck. His businesses failed. His marriages failed. His investments failed. And now, his health is failing too. “How did it come to this,” he wonders. “How could I be such a moron?” Today, we wonder for the whole nation.
This just in from Business Insider: "US households are on the brink with excess savings likely to be depleted by month-end, San Francisco Fed says Savings built up by American households during the pandemic are all but gone, the San Francisco Fed says. US household savings have fallen from a record $2.1 trillion in 2021 to around $190 billion as of June, per their data. It may indicate a wider squeeze for Americans – who must contend with the highest interest rates in 22 years."
Dot… to Dot… to Dot… And then, this little item came in from Fortune: "Nearly two-thirds of Americans are living paycheck to paycheck, study finds. Research from LendingClub finds that 61% of adults were living paycheck to paycheck as of July 2023, a two-point increase from the previous year. That comes even as inflation rates have dropped from 9.1% last July to 3.2% this year. The breakdown of people living paycheck to paycheck was fairly evenly spread. Low-income consumers - those earning less than $50,000 annually - saw the biggest increases, rising from 74% in July 2022 to 78% in July 2023.
What happened? How did it come to this? Is this just the nature of things…that the middle classes are always “on the brink” of ruin? Or is it a feature of public policies? Here’s another dot to connect: "The Fed's balance sheet reductions have hit $1 trillion… Where once the Fed's portfolio held around $8.4 trillion in assets, the institution's System Open Market Account now shows that this has fallen to just under $7.4 trillion. These balance sheet reduction efforts are more commonly known as quantitative tightening, and are a strategy deployed by the central bank to drain excess liquidity from markets."
Giveth…and Taketh: The Fed giveth and the people are happy. The Fed taketh away and the people hurteth. But what is it that it gives and takes? The Fed does not print ‘money.’ And when it ‘reduces its balance sheet,’ it does not take back the money it didn’t give out in the first place. Money is a stand-in, like a claim ticket from a parking garage. It represents real wealth. The Fed has no pink Cadillac…no black Mariah…no silver Ford F-150. It comes onto the lot with nothing. And then, it prints up a claim ticket, giving the holder the right to take any car on the lot.
How could anyone ever think that was going to work out? The Fed offers credit, not money. Money is a claim on real wealth, already in existence. Credit is all “on the come.” It claims wealth that may or may not come into being…and draws on it in the present. The poor borrower drives off in a newish Mercedes. But it is not his car. And sooner or later, he’ll have to return it.
This is not just a theoretical matter. A man who spends all his savings is broke. Busted. He has nothing. Too bad. So sad. But the man who borrows…spends…and can’t pay back is not only a disappointment to himself, but like a soldier who loses his nerve on the battlefield, he’s a danger to the whole army.
Debtors have creditors. The creditors have creditors of their own…and bills to be paid…and holidays planned months in advance…and, if they are banks, federal regulators who will shut them down if their accounts are out of order. Apparently, US households are down to their last dime. And here comes the Repo Man. The Washington Post: "More Americans are falling behind on their car loan and credit card payments than at any time in more than a decade, a troubling signal of consumer stress as higher prices and rising borrowing costs are squeezing household budgets.
Self-Inflicted Wounds: How could that be? As we saw yesterday, the typical working man (and woman) is actually making less per hour than he did in 1966. Basic commodities are cheaper (in terms of hours of work needed to buy them). But finished products – those that he actually buys…those that should benefit from more technology – are much more expensive. And GDP growth rates have come down…decade after decade…from the ‘60s. We used to expect growth rates of 3% to 5%. In 1966, US GDP rose more than 6%. In 1984, it went up by more than 7%. Now, we’re lucky if we get 2%. For the last 10 years, GDP growth has averaged only about 1.5%.
The numbers are always a little slimy and slippery. But for the purpose of today’s cogitation, let us imagine that we are right: 90% of the population has gotten poorer, not richer, over the last half a century. They owe $12 trillion on their houses. Another trillion on their credit cards. And now, it’s time to return the Mercedes. And let us set up our wondering for tomorrow: what kind of morons would do such a thing?"
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