BEST OF KURT RICHEBACHER
February 20, 2004
Our differences of opinion with the bullish consensus about the economic and financial situation in the United States have many reasons. One of them is a radically different apprehension of wealth and wealth creation. America’s policymakers and economists view asset inflation as wealth creation as if this were a self-evident fact. What this asset inflation truly generates is phony collateral for runaway consumer indebtedness, luring the consumer into unprecedented debt excesses. It is phony wealth creation because unlike the real wealth creation through capital investment, both its creation and its use involve no income creation.
This perception of wealth creation, actually, runs completely counter to traditional thinking in economics. It has always been apodictic in economics that there is but one way to create genuine wealth for an economy as a whole, and that is to consume less than current production or income. Wealth creation from the macroeconomic perspective essentially occurs through saving and investment in tangible, income-creating plant, equipment, and commercial and residential buildings.
Guided by the Greenspan Fed, America is practicing a radically different pattern of "wealth" creation. An extremely loose monetary policy forces up asset prices, providing both the impetus and collateral for higher borrowing. Being offered almost limitless credit at rock-bottom interest rates, the consumer responds with a frenzied borrowing and spending binge.
The crucial thing about this new American way of wealth creation is that it takes places entirely outside the national product. Its gist is to inflate asset prices by inflating credit. But what gives it such great dynamics is the conventional practice to value the vast mass of existing shares and houses in line with movement of the price of the last, marginal trade.
It is really like printing wealth.
The crucial concern is the inherent effects of this so-called wealth creation to the economy. Asset inflation by itself has no effects at all. Its economic effects arise only from the associated increase in consumer borrowing and spending. But that has two highly malign effects. An endless escalation of unproductive debt is one. The other is that consumption takes an ever-greater share of GDP. Overconsumption is, really, America’s deep-seated, structural disease, and asset inflation is worsening it.
Grossly distorted economic growth at the expense of saving and investment is one dangerous legacy of America’s asset inflation. The exponential rise in the consumer’s indebtedness in relation to his badly lagging income growth is the other. A savage debt deflation is the inevitable outcome. But this kind of deflation does not lower interest rates. It boosts them. Basically, the Fed has lost control.
CONCLUSIONS:
U.S. economic growth is no longer based on saving and investment. Its essence is that credit excess provides soaring collateral for still more credit excess creating still more asset inflation for still more borrowing and spending excess. It seems like a perpetual motion machine that just goes on cranking out wealth and spending. It is important to see that the true name of this game is bubble-driven growth, and all bubbles end by bursting. America is the next Japan.
February 20, 2004
Our differences of opinion with the bullish consensus about the economic and financial situation in the United States have many reasons. One of them is a radically different apprehension of wealth and wealth creation. America’s policymakers and economists view asset inflation as wealth creation as if this were a self-evident fact. What this asset inflation truly generates is phony collateral for runaway consumer indebtedness, luring the consumer into unprecedented debt excesses. It is phony wealth creation because unlike the real wealth creation through capital investment, both its creation and its use involve no income creation.
This perception of wealth creation, actually, runs completely counter to traditional thinking in economics. It has always been apodictic in economics that there is but one way to create genuine wealth for an economy as a whole, and that is to consume less than current production or income. Wealth creation from the macroeconomic perspective essentially occurs through saving and investment in tangible, income-creating plant, equipment, and commercial and residential buildings.
Guided by the Greenspan Fed, America is practicing a radically different pattern of "wealth" creation. An extremely loose monetary policy forces up asset prices, providing both the impetus and collateral for higher borrowing. Being offered almost limitless credit at rock-bottom interest rates, the consumer responds with a frenzied borrowing and spending binge.
The crucial thing about this new American way of wealth creation is that it takes places entirely outside the national product. Its gist is to inflate asset prices by inflating credit. But what gives it such great dynamics is the conventional practice to value the vast mass of existing shares and houses in line with movement of the price of the last, marginal trade.
It is really like printing wealth.
The crucial concern is the inherent effects of this so-called wealth creation to the economy. Asset inflation by itself has no effects at all. Its economic effects arise only from the associated increase in consumer borrowing and spending. But that has two highly malign effects. An endless escalation of unproductive debt is one. The other is that consumption takes an ever-greater share of GDP. Overconsumption is, really, America’s deep-seated, structural disease, and asset inflation is worsening it.
Grossly distorted economic growth at the expense of saving and investment is one dangerous legacy of America’s asset inflation. The exponential rise in the consumer’s indebtedness in relation to his badly lagging income growth is the other. A savage debt deflation is the inevitable outcome. But this kind of deflation does not lower interest rates. It boosts them. Basically, the Fed has lost control.
CONCLUSIONS:
U.S. economic growth is no longer based on saving and investment. Its essence is that credit excess provides soaring collateral for still more credit excess creating still more asset inflation for still more borrowing and spending excess. It seems like a perpetual motion machine that just goes on cranking out wealth and spending. It is important to see that the true name of this game is bubble-driven growth, and all bubbles end by bursting. America is the next Japan.
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