Editor’s Note: This article grew out of an ongoing email correspondence on banking and economics between me and it’s author, Kelly Cowan. Kelly is an artist, investor and observer of the economy and capital markets. Although she left the professional investment world behind long ago, she is a close watcher of economic and market trends. She maintains close contacts with a number of individuals in the investment world. –efc
FROM THE TEMPLE OF DEBT a prayer rings out. It is the busiest time of year for the Cathedral of Commerce. ‘Tis the season of Debt.
A critical issue facing this nation is our debt problem. Excessive levels of both private and government debt exist today. There are two ways to deal with debt: service the debt or default on the debt. With default can come deliberate debt reductions or bankruptcy. Current debt levels are unsustainable and there is no way to service all this debt. The debt cannot and will not be repaid. The wealth just isn’t there. We are living in an era of negative equity.
All this debt was accumulated for consumption and speculation on asset prices. It was not used to expand production. This increased debt burden did nothing to add to productive capacity. So where did the money go? The debt was secured by asset values that were never really there (no, your two bedroom house that hadn’t been remodeled since the 50’s was never worth $1 million; it was an arbitrary number created in speculative ecstasy). The choir of lenders sang borrow, borrow, borrow. The money borrowed against these assets was used to purchase stuff, and useless stuff at that. Much of that stuff came from China; we shipped dollars to China and China shipped stuff to us. US consumers consumed more than they produced, using borrowed money (much of it from China) to pay the difference. Chinese consumers produced more than they consumed and saved the difference. America borrows China’s savings.
The solution is to unwind the debt and allow the necessary hits, however painful. Pain management will require a lot of emotional resources. The adjustment period is underway. The dynamic is in play and we need to decide how this will occur. Instead, we are pushing the problems down the road and expecting a miracle
The Federal Reserve Bank (the Fed) is the temple where this miracle is being preached, and Ben Bernanke, its chairman, is the High Priest. The stated mission of the Fed is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Perhaps Bernanke and friends didn’t receive the memo.