On Black Friday, Americans poured into shopping malls all over the country. On MSNBC, news anchors were shamelessly praising the American Consumer: “He’s back! The recession is over.” Everyone seems to believe that spending is what drives the economy, but this is a cruel myth.
Savings and production drive the economy because they give consumers purchasing power. The U.S. economy is drowning in debt, and everyone in charge is demanding that consumers spend more. Printing paper dollars does not create wealth or purchasing power, just the illusion of wealth. This was the cause of the U.S. financial crisis.
How anyone could possibly believe that already debt-ridden Americans shelling out their savings for foreign goods is helping the economy is beyond me. An unemployed person swiping a credit card to buy a giant LCD TV is not growth. If China wanted to show proof of its economic growth it would point to its factories pumping out products. It would show Americans with online shopping carts using credit cards to buy Chinese goods.
This brings me to my main question: In the last few years, has the U.S. economy gotten better, or worse?
Let’s start with the bank bailouts in 2008. It’s irrelevant whether you blame the banks or the Federal Reserve for the financial/housing crisis of 2008. I believe both parties are to blame. An egregious robbery of the wealth of the innocent public is usually the result of any big business/big government corporatist romance, and this story was no different.
The easy credit policies of the Federal Reserve gave banks, in layman’s terms, free money, which the banks used to make loans that under a true free market wouldn’t have been possible. When the bubble popped, George Bush was there to give our money to the negligent banks to keep them afloat, even as he had the gall to blame capitalism for the debacle. Despite their reward for bad behavior, the banks have decided to sit on all the reserves they received. Add one moral hazard for future banking, and chalk this one up towards a worse economy.
After the bailouts, major economic events have included a stimulus package and a buying of treasury debts by the Federal Reserve. Throughout the aforementioned events, the U.S. Federal Reserve effectively doubled the money supply. Eventually, these currency reserves will reach the economy.
Think about it: if there are twice as many paper dollars in the economy, each dollar will be worth, at the very least, half as much. If Americans continue to indulge in their obsession with spending, both as individuals and as a nation, they will eventually have to choose between two equally dismal alternatives. Either the Federal Reserve will have to allow interest rates to raise back to their real market rates, causing the real value of U.S. debt to be realized and accounted for, or the federal government will have to continue to spend themselves into inflationary oblivion.
I know what you’re thinking: “Jesus, man! You’re acting like this is the end, the apocalypse with no way out.” The truth is, there is a way out of this crisis, and it’s blatantly obvious—we need look no further than Great Britain.
In the face of massive deficits, the British Parliament cut spending drastically across the board. They are also starting to raise interest rates back to a realistic level and are allowing the market to make the necessary corrections to facilitate actual wealth creation. The British are going to be the first country to recover from the global financial crisis because they are, interestingly, the only country to abandon Keynesian economic policy.
In two decades, Bill Clinton, George Bush and the Federal Reserve did not grow an economy but used the easy credit policies of paper money to build a house of credit cards. In the last few years, Obama has not fixed anything but simply added more layers. Every LCD TV bought with spending that came from paper, not savings, is just another card. Eventually this house must fall, and the higher it gets the more destruction it will cause when a breeze of reality knocks it over.
Peter VandenBerg is an economics sophomore. He can be reached at
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