The economy: riding for a fall

 

I've tried to avoid posting too often about the parlous state of America's economy, because many of my readers find it frustrating and depressing.  We can point out problems, but we're powerless to do anything meaningful about them, and those who have the power to do so aren't interested.

Nevertheless, I watch economic developments carefully.  I remain convinced that we're headed for a very serious economic crisis - in fact, we're already in one;  it's just that many people refuse to believe the evidence in front of their eyes, and prefer to pretend that things will eventually be OK.  I'm afraid I can't agree.

Karl Denninger made a trenchant point yesterday.  Emphasis in original.

In a bubble economy, where the government is pressing new credit into the hands of the public, directly and indirectly, every business plan looks good.

When the impact of that action turns back into inflation, and it always does, wherever that inflation shows up ultimately detonates every one of those firms.

The truth is that every firm is only stable on an continuing concern basis if it can sell its goods and services at a profit without said excess credit creation.

If it can't then the business model is bankrupt and said temporary success only occurred because of a scam, whether the firm was doing the scamming or they were riding a government scam.

. . .

When did the latest consumer credit insanity start?  May of 2021, roughly.  Take a look at this graph and tell me what you see.  35% expansion in credit card debt over roughly two years time is "reasonable"?  This is not people charging up a card  on a monthly basis and then paying it off: This is expansion of balances on which interest must be paid which, I remind you, on revolving accounts that interest is often at rates higher than 20%!  In fact the average rate has risen by more than 5% in the last year.

. . .

The entire economy is full of these schemes that in fact have negative utility value and no future except through the blowing of more inflationary bubbles.  That only works if you get lucky as to where the inflation appears in the economy in terms of prices and that cannot be controlled.

Everyone loves it when its in stocks.  Some people love it -- for a while -- when its in real estate, right up until it forces out all the service workers we all rely on in order to be able to buy gas and groceries and as soon as it shows up in places like car and homeowners insurance, electricity, taxes and similar the rope which you have placed around your neck by allowing this crap to continue and in fact cheering it on is about to become taut.

There's more at the link.  Highly recommended reading.

In so many words, the economic "good news" that so many are getting excited about is nothing more than excessive government spending.  It's not coming from the average consumer, who's looking increasingly indebted, tapped out and desperate.  Elliotwave goes so far as to claim:  "The debt bomb implodes: Expect recession and deflation".

Daniel Lacalle notes:

Allow me to explain why we have not seen a recession yet despite the collapse in base money supply. We are witnessing the stealth nationalization of the economy. What does this mean?

The entire burden of the monetary collapse and rate hikes is falling on the shoulders of families and small businesses, while large corporations and governments are virtually unaffected.

Thus, when an agent like the state, which weighs 40 to 60 percent of GDP in most economies, continues to consume wealth and spend, gross domestic product does not show a recession even though consumption and private investment in real terms is declining. Bloated government spending is disguising a private sector recession and the decline in real disposable income, real wages, and margins of SMEs (small and medium enterprises). Furthermore, the accidental and exogenous factor of widespread weaker commodities is boosting the external contribution of gross domestic product.

These are the main reasons why we are living in the middle of a recession and destruction of private wealth and wages, but the official data does not reflect it. As government weight in the economy rises faster, technical recessions may not appear in the official data, but citizens suffer it, nevertheless. The reader may think that this is good news because the spending of governments goes straight to the citizens via social spending. However, there is nothing that the state provides that it does not take away from the private sector now or in the future - deficit spending now means higher taxes and lower real wages afterwards. Therefore, the flipside of “no official recession yet” is “more public debt now and after”.

The rapid decline in global money supply is staggering, at -3,4% at the end of the first quarter according to Longview. Meanwhile, in the United States, money supply is also contracting at the fastest pace since the great recession. Consider that, in the same period, government indebtedness at a global level is up 3% and United States borrowing has also risen faster than real GDP, according to the IIF. And those deficits are financed even if the cost is higher. Governments do not care about rising borrowing costs, because you pay for it.

. . .

The problem when government spending ignores any monetary tightening is that the second leg up of inflation comes from even higher state subsidies using new units of currency, and the downward spiral may start and become impossible to stop. As the interest rate and credit access of the backbone of the economy, households, and SMEs, gets worse and dries up, governments step in to solve a problem they caused by creating even more entitlement and subsidy expenditures with constantly depreciated units of currency.

. . .

The money supply slump and rate hike path so far are destroying the backbone of the economy, families, and small businesses.

Again, more at the link.

That's the very definition of inflation.  It's not that goods are costing more to produce:  it's that the dollars used to make and buy them are worth less, because they're being constantly depreciated (i.e. lessened in value) by printing more and more of them without any economic foundation to back them up.  We're destroying the value of our own currency, and the rate at which that's happening is getting faster and faster the more dollars we print.  I'm sure many readers are familiar with this or similar graphics (click the image for a larger view):

That's ongoing.  It won't stop as long as we keep printing dollars like there's no tomorrow - and you and I, who depend on what dollars we can earn to buy the necessities of life, are going to suffer because of it.  Those doing the printing won't suffer, of course:  they'll raise their salaries enough to make sure they can cope.  The rest of us don't have that luxury.

What can we do about it?  Nothing in the broader economic sense.  Nobody is listening to us, and nobody in power will, whether Democrat or Republican, left- or right-wing.  They're too busy making hay while the sun shines.  However, there are things we can do to prepare ourselves for economic hard times.  We've spoken about them in previous articles.  They include (but are not limited to):

• Get out of debt.
• Build up a cash reserve as best you can, ideally worth at least six months' expenditure, but if you can't manage that, even a couple of weeks' worth is a whole lot better than nothing.
• Build up your emergency supplies using foods and essentials that you already consume.  If you hit an economic bump in the road (e.g. you lose your job, or have an unexpected medical expense that consumes all your available income for a month or two), you can live off those supplies instead of buying what you need.
• Try to develop more than one stream of income;  a second (or third) job, a sideline that can earn you off-the-books income (e.g. using your knowledge of plumbing, electrical wiring, HVAC, vehicle engines, even yard work, to help your neighbors in exchange for whatever they have - not just money, but food, reciprocal labor, etc.).
• Keep your eyes and ears open to understand what's going on with the economy.  An astonishingly large proportion of people have no idea how serious is our economic plight right now.  Forewarned is forearmed.  If we know that an economic sector is in dire straits (for example, the tourist/hospitality industry), and we're involved in that sector (e.g. as an AirBnB host, or a hotel employee, or a restaurant staffer), we can see the threat to our jobs and income before it arrives, and begin to look for alternatives so that we beat the rush later.
• Built support networks among like-minded individuals and families, so that when (not if) things get tough, you're already set up to help each other.

We're all going to have a hard road ahead, friends.  Let's help each other to make it through.

Peter