Monday, March 30, 2009

ECON 101

Financial analysts talk funny. Today I received in the mail an article by one of them which highlighted this profound obsevation:

"Debt-financed consumption is no longer a sustainable model for global economic growth."


Did debt-financed consumption used to be a sustainable model for global economic growth? Was it ever? And who in the world was toying with that model?

My Dad used to say that the last depression was caused by speculators and the next one would be caused by borrowers. Prophetic. He died in 1958. Mother always wanted a brick house. Dad was happy to stay in our frame two story home on the west side of Detroit. He said it was paid for and that he could sell shoe laces and live there.

He would have thought debt-financed consumption was insane and immoral. Borrow money to go on vacation? Borrow money to buy Christmas or birthday gifts? Borrow money to spend? Unthinkable. You borrowed money to invest; to buy a house, maybe to buy a car, if you really needed one.

The people of the Great Depression learned to live hand to mouth, scrape to get by, go to bed hungry. Hand me down clothes, half soled shoes, back yard vegetable gardens; these were hallmarks of an era when survival trumped comfort, when a penny saved was a penny earned, when being a debtor was tantamount to being enslaved.

How can anyone be surprised by our current economic collapse when the American people have run up nearly three trillion dollars of personal debt? Didn't anyone wonder why people with no visible means of support were getting weekly offers of credit cards, for which they had been notoriously 'pre-approved'?

And how is it supposed that what we need now is to rev up the flow of credit? The flow of credit is what got us into this mess. What we need now is to pay off debt, save our money, get back to solvency, both as individuals and as a nation.

Of course, that's not what you hear from Washington. Our federal government is all about bailouts, stimulus, spending incomprehensible amounts of money to get us back to the halcyon days of the 1990's when everybody danced and nobody thought about paying the fiddler.

The good news is that capitalism is in the genes. People always act in their perceived self interest. Sometimes that perception is cloudy, and they go off in the wrong direction. But when all the artificial costumes are ripped away, and the king is seen to be in the altogether, people do what they need to do.

The American people say "let the car companies go bankrupt", "let the big banks and investment funds go belly up." At the core, they believe in free enterprise. They know that when you let the losers lose, you make it possible for the winners to win.

An orgy of corporate mergers and acquisitions has given us a corporate landscape bloated with unnecessary employees, duplicate corporate officers,unjustified frills, fringes and favors. In the natural course of events they will crumble and be overtaken by new, lean, competitive organizations with new ideas and a new culture of efficiency.

The cycles of boom and bust, bull and bear, the ups and downs of a free economy are self regulating. They are the self policing consequences of free men and women making free decisions about their own material well being.

America will survive because Americans will survive. The best thing the politicians can do is to get out of the way.