Over the years, we have written multiple times about the system of Keynesian economics, its dysfunction…and the fact that it is a pure lie. This has all been well-documented from studies, observations, right down to remarks made by Keynes himself regarding the long-term viability of his new faux economics.
However, from Keynesian economics, there has morphed another type of economics. A more ignorant and destructive type of scarce resource allocation – which is what economics really is after all – and this type is no respecter of persons, intellect, position, or influence. We could easily call it the economics of entitlement, but that would be misleading because when most think of entitlements, they think about Social Security, Medicare, and other government programs. No, that’s not where the sense of American (and global) entitlement ends. It ends with the average working stiff who is paying 20% on a $40,000 / 7 -year truck loan with a balloon payment because his buddies told him he wasn’t cool if he didn’t have such a truck. There are zillions of other such examples of financial stupidity, however, nobody is bothering to tell these folks that they’re committing financial suicide. The banks certainly aren’t going to tell them. The government? Talk about the kettle and the pot. Or maybe there is too much legal pot. We certainly can’t legislate common sense, but we sure try to legislate away the consequences of foolish behavior.
Yes, we feel we are entitled to have whatever we want, whenever we want, regardless of price or cost. Note there is a difference between price and cost. Price is the number of depreciated American dollars you need to part with in order to obtain the toy of the day. The cost is real amount of labor you pledge, lost sleep, heartburn you endure or other opportunities you forego in order to have that toy. Big deal guys, right? Well it is a big deal. We are going to show you quite a few charts today. You’ve seen some of them before, so part of this editorial will be an update of sorts, but then we are going to take a look at what individuals might do on an individual and community level to insulate themselves to some degree from the fallout that is inevitable from the decades of abuse of the true laws of economics.
Yes, ‘American Economics’ makes its own ‘rules’, and then violates them. Point in fact is the Gramm-Rudman-Hollings Balanced Budget Act passed in 1985. Congress and various administrations have a rich history of making, then breaking their own rules. All for convenience, political or otherwise. All to change the lens by which the population views its circumstances. All to encourage the masses, like lemmings, to continue upon a path that is unsustainable for them, but very much desirable for those who seek to rule all who walk the Earth. Washington, DC is not the capital of this ridiculous system, but is merely a dot on a map. The real perpetrators have no silly notions such as national pride, national identity or even national borders as has become so glaringly evident these past two decades. We think you get the point. So without further delay, on to the charts!
Consumer Credit Outstanding (Andy’s Favorite)
We’ll lead off by saying this is no surprise. That the continued willingness by the US Consumer to run up debt shouldn’t be a surprise, but rather what it takes to disturb that willingness. Let’s take a look at a corollary chart, this one that looks at consumer credit as a percentage of US GDP:
Consumer credit outstanding sits just shy of 20% of GDP as of the last report in February of this year. People might not think this is such a big deal but remember, this is not ALL consumer debt, as paradoxical as that might sound. For example, this number doesn’t include mortgages or home equity loans. The metric includes the types of debt that are used to purchase consumer goods such as credit cards (revolving) and auto loans (non-revolving). In the current release of the report, the rate of growth (annualized) is 5.75%. By comparison, the annualized rate of GDP growth last quarter was 1.2%. So consumer credit growth is outstripping economic growth by a factor of greater than 4:1. This is a great example of ‘American Economics’. The Wall Street Journal, one of the biggest perverters of economics out there, strongly implied that a greater than expected growth in consumer credit in the July report is good because it indicates ‘steady household spending’.
Is there a line in the sand somewhere in here? Borrow beyond that and bad things happen? We know that at the sovereign level, the Eurozone countries started running into problems when debt levels passed 100% of GDP. Perhaps a little common sense kicked in at this point. Who knows where common sense kicks in for the consumer, but the chart below paints a somewhat lurid picture:
Looking above we see the irony of debt. Those with nothing borrow the most. Care has been pitched to the wind, the towel thrown in. The next group is the most interesting. They have little net worth. There is no real detail available about where the net worth comes from, but these folks are fighting the descent into the credit black hole. Notice that as net worth increases, the tolerance to take on debt increases, but only gradually. The same source that published the chart above stated that of households that carry a balance on a credit card, they average over $16,000 in credit card balances. Given the median household income is somewhere in the mid to upper $40K range, these households credit card debt / GDP ratio is somewhere around 30%. Don’t forget that this is JUST for credit cards, not non-revolving credit, and certainly not any type of mortgage, home equity, or student loan debt.
The Translation of Debt to Growth in a Fiat System (Graham’s Favorite)
The ‘school’ of ‘American Economics’ also badly butchers ideas of money, capital, and growth. The media and financial establishment touts the printing press as the solution to everything that ails us. We could drop money from helicopters a la Ben Barbasol Bernanke. How’d that work, slick? You printed a bunch of currency (not money), you blew up more bubbles than a kindergarten class turned loose in the novelties section of the dollar store, and you accomplished absolutely nothing.
This devious bunch asserts that capital is not the result of savings and foregoing of consumption, but rather is created by governments, with the aid the aforementioned printing press. They will never acknowledge that the federal reserve is not part of the government because then you poor people might wonder exactly whose interests that bank represents when it embarks on stupidity such as quantitative easing, ZIRP (zero interest rates to perpetuity), etc. They will certainly never tell you that every ‘dollar’ that comes into existence comes into being a financial bastard child – half improvised, half compromised. It comes into existence at interest. Owed to a private bank. By you. Don’t believe us; do your own homework, please.
Perhaps the biggest lie is that ‘inflation’ is necessary for economic growth. In a system where there is nothing backing the currency other than promises from old windbags in fancy suits, inflation IS economic growth. They are interchangeable concepts. Read the whitepapers and minutes from central banks around the world. Read the minutes from the latest meeting at Jackson Hole, Wyoming. Central bankers fear there isn’t enough inflation to ‘stimulate’ growth.
The methodology is simple. You have a certain number of economic actors in any economy. There is a reasonably fixed quantity of goods and a finite demand for such goods (see the law of marginal utility). Then there is a supply of money that is used to purchase these goods. Raise the supply of money available to the actors and you will see prices go up. Think of an auction. Our economies aren’t truly auction type in nature at all levels, but at the basic levels they are and that pushes through to finished goods. So raising the supply of money is monetary inflation. This results in price inflation. People pay more for goods. Stay with us.
Since people are paying more for goods, retail sales will increase (because the metric is based on amount spent, NOT units sold), GDP will increase for the same reason. The WSJ, etc. will clamor about a growing economy when it is nothing but the inflationary effect.
This is where it really gets interesting. How is inflation created? The central bank can print money (at interest) and dump it into the banking system. Then what? The banks loan the money. They don’t sit on it. They loan it. Or, another way: you deposit your $1000 paycheck into your bank account and the bank turns around and makes $9,000 worth of loans on it thanks to a concept known as fractional reserve banking. So where there was $1000, there is now $10,000. Voila – inflation. We already know that inflation devalues the currency. Now, reading above, we see that when banks make loans, they help create inflation. So… We can, by extension, say that consumers actually devalue their own currency when they take on debt. We also know that when consumers balk at taking on more debt, their government is always ready to stand in and help, especially in America. Remember, the government operates at the behest of the banks. So when the federal reserve says ‘inflation is running too low and the suckers are paying their loans down instead of taking new ones, you need to borrow for them’, that is precisely what happens.
Looking Ahead – Strategies For A Brave New World
A good deal of what we’re going to say here is probably common sense, but as we are repeatedly reminded, common sense isn’t so common anymore. Let us preface the following remarks that we don’t believe investing in stocks is the answer. We don’t believe that investing in bonds is the right answer. Or options, futures, or any of the newfangled products out there, which are designed to give the banksters immediate and lasting access to your wallet. Now we realize there are a good many people reading this column who don’t have so much choice in the above. They work for companies that provide 401(k) plans. The trick of this whole thing is matching funds. Many plans say that the company will match your contributions up to a certain percentage or dollar amount. In many cases the money for the matching comes from the administrators of the 401(k) plan or the mutual fund companies whose funds are available to plan members. They basically bribe you to invest in their plan. This is especially the case with larger companies.
Most people look at this as free money and if their employers offer a match up to 5% or whatever, they’ll kick in that amount. The biggest problem with these plans is that very few have flexibility. You have to take a side. You have to invest in something. Sitting in cash isn’t an option. You’re either in stocks or bonds. You might have the ability to diversify geographically, such as global growth, global small cap, Asian growth, etc. We have both seen plans with as few as a half dozen choices. None of these plans allow you to wait out market blowouts on the sidelines. That is probably the biggest drawback of these plans. The second is that, many cases, the only way to get your money is to leave the job depending on the plan.
For obvious reasons, pension plans are even worse, especially plans run by some level of government. You are compelled to make contributions and have no say in how those contributions are allocated. It’s a black box type of system, very similar in nature to social ‘security’.
What you need to do if you’re involved in an employment situation where there is a restrictive retirement program going on is to set up a parallel savings plan on your own. We realize that in many cases this is very difficult, but if you’re faithful, even a small amount each week will add up. We will go as far as to say that the future is so uncertain that everyone reading this article should consider cutting back on their standard of living to execute some of the ideas we’re going to list below. I know that is veritable blasphemy here in the land of entitlement, but you can either do it now on your own or do it later on someone else’s terms.
If you have savings and you prefer not to have it bailed-in, decimated by the financial markets or otherwise maligned, forward purchasing is a good tool. It basically consists of making lists of things you know you’re going to actually need moving forward. Examples of these might be a roof for your house, modest transportation, various supplies (especially those that don’t expire), tools, and other things that might help you live away from the system. Every step you take is one towards freedom. Many people have been spending money to put in large gardens. This is a fantastic idea. Not only is the food better for you, but a garden can be a great thing that families can do together. Instead of rotting our brains on our i-This and that, we can get outside, do some physical labor, spend quality time as a family and produce food for ourselves.
There are many other examples of purchasing forward. Take a look at your situation and write down all the things you’ll actually NEED in the next year, three years, five years, and ten years. It is important to designate needs from wants. We have a big problem with that in this country.
If you need help differentiating between the two, here is a graphic of Maslow’s hierarchy of needs:
Since you can’t buy love (we know, it’s a song), you should be focusing on the two lowest sections of the pyramid in terms of economic allocations. The next two levels can be achieved through your relationships with family, friends, significant others, philanthropy towards others and things of that nature. Self-actualization, the top rung, is basically going out and making your life fit the image of how you view yourself. This is where most Americans get into trouble. They put the self-actualization stage (which is where you go out and buy yourself a fancy car because that’s how you view yourself) of the pyramid much lower, like #3 instead of #5. By doing this, America has pretty much just screwed up her priorities. Family, relationships, and the comfort brought by the same have been replaced by toys. Notice that self-esteem gets pushed to the top of the pyramid when toys come first. Tell us you don’t know don’t know someone who has all the toys, but is miserable, and in reality doesn’t like themselves very much. While Maslow had some very debatable principles, this hierarchy of needs is spot on in our humble opinion and has a definite bearing on economics – and perfectly explains ‘American Economics’
Standard Of Living Adjustments
If you’re going to successfully achieve the above, you’re most likely going to need to do a voluntary adjustment of your living standard. ‘American Economics’ needs to be replaced with sensible Colonial American economics. Thrift, saving, capital formation, and cooperation were the staples of the economics of that time. They need to rise to the forefront again. We understand we are not going to change the nation. There are many who every four years get the idea in their head that if a particular person wins the Offal Office that suddenly all our problems will go away. Since we are a big part of our problems, the change needs to start with us. At the bottom. The power has always resided within the People. We need to embrace that role and begin to act responsibly.
It will be a 180 degree turn for many. You can lead the way in your neighborhood. Search out likeminded folks and get together with them. Form co-ops even if it is just information sharing at first. This is going to be a very hard sell, especially in a land where people think they are entitled to all of the largesse, even though they have no feasible way of paying for it whatsoever. Most are in passive-aggressive denial about it, too.
So the key question here is what happens to make people realize that they’re not entitled? A good old fashioned economic beat down might. The Europeans have taken an actual and very real beating over the past few years and there are still vestiges of the entitlement mentality left in their society. We got off relatively easy in 2006-09 and we believe that was by design. The establishment wanted a consolidation of wealth, to rip America off some more, but not so much that the events jolted people out of their mental model of American superiority regardless of laziness, complacency, or bad economic behavior.
Regarding the financial system itself, there are a couple of big things you can do. There is no magic bullet fix. There are many smaller partial fixes though. Our advice to those of you who already understand the condition of the financial system and the peril it presents to the average person’s wallet is to begin a program of the following:
1) Reduce financial intermediaries. Keep your assets close. We’ve talked about this is previous columns, but as always, there are new readers. If you have stock investments, get them out of street name. Use the Direct Registration System. Setting it up can be time-consuming, but it is worth it. If possible, get a paper certificate for your stocks, although this is increasingly difficult to do. DRS is a good alternative.
2) Divorce yourself from commercial banks. Use credit unions. Look at the TARP allocations from 2008. See how many credit unions had to be bailed out. Very few. Why? Because their rules are stricter for loans, etc. They don’t have broker/dealer operations coupled with the credit union. They farm out their investment services. The bail-in is not nearly as likely to happen at a credit union as it is at a commercial bank. At the same time, you must realize that credit unions are not immune and the establishment is intent on forcing a cashless society on us. That will change the game totally.
3) Put some of your wealth in tradable media. Junk silver is an excellent monetary alternative. It’s recognizable, has tangible value, and is easily obtainable. This is where the naysayers start yammering about tinfoil hats, but they’re fools because junk silver used to be money in circulation. It still is. You can take a 90% silver Washington quarter and spend it as 25 cents at a store. Doing so would be kind of foolish given its metallic value, but you can do it. If the world goes cashless, having some real money would come in very handy, although it is at least somewhat likely that merely having it would be illegal. The whole idea of a cashless society is so that every transaction and every person can be tracked. Credit cards alone have given the establishment a huge advancement in that regard.
4) Embrace liberty in whatever aspects of your life you can. If you have land, use it. Purchase books on raising animals, producing food, especially making the most of what little space you have. If you have like-minded neighbors, form co-ops as we mentioned above. If you have skills, teach others and let them teach you their skills. Work together. We’ve seen all the divisive actions taken by our leaders and the pop culture. That’s the establishment at work. It wants us fighting each other and killing each other even, not working together. It’s a very poorly disguised sham. See through it. Help others to do the same.
In conclusion, all of the things we mentioned above as suggestions are going to take time. Most of us are very busy. Start small. Carve out an hour or two a week. Most people spend many multiples of that on anti-social media apps like Facebook, etc. The important thing to remember is that this isn’t a fad, it is a mindset and a way of life. It will take time, but it will change your life for the better. It is long past time that the concept of ‘American Economics’ got placed exactly where it belongs – in the trash can of history along with its half-sister Keynesian economics. Both have been nothing but trouble for regular people all over the world. We wish you the best of luck in this endeavour and are happy to share what we know about the material above. Here’s to your newfound independence!
Graham Mehl is a pseudonym. He currently works for a hedge fund and is responsible for economic forecasting and modeling. He has a graduate degree with honors from The Wharton School of the University of Pennsylvania among his educational achievements. Prior to his current position, he served as an economic research associate for a G7 central bank.
Andy Sutton is the former Chief Market Strategist for Sutton & Associates. While no longer involved in the investment community, Andy continues to perform his own research and acts as a freelance writer, publishing occasional ‘My Two Cents’ articles. Andy also maintains a blog called ‘Extemporania’ at http://www.andysutton.com/blog.
Andy Sutton is the Chief Market Strategist for Sutton & Associates, LLC – a Registered Investment Adviser in Pennsylvania. His focuses are econometric modeling and risk management. The firm specializes in wealth preservation and growth and recognizes the validity of non-paper assets in achieving a balanced approach. The firm is also currently working with a growing clientele towards avoiding the risks outlined above.