There was an intriguing headline in the Telegraph by Jeff Randall this morning, Debt juggernaut rolls us into a madhouse. The article describes conditions in the U.K., but could easily have been written about their cousins across the pond. Speaking about a television show that would air today they said:
Our interviewees are a cross-section of modern Britain, where millions of people have been lulled into a false sense of prosperity by the soporific sound of easy money, credit on tap.
Gordon Brown keeps telling us that, under his stewardship, this country has enjoyed its longest-ever period of economic growth. Were a business to make a similar boast, you might expect it to have cash in the bank.
Yet, according to a survey by KPMG, 22pc of Britons are struggling to repay their debts and 35pc fear that this year it will become even more difficult to make ends meet. The Brown boom has, perversely, produced a massive explosion in the numbers going bust.
Since the start of the new millennium, British households have been spending more than they earn. The gap has been bridged by an unprecedented borrowing binge. We want, but can’t wait, won’t wait. Tomorrow is too late.
I was struck by Randall’s statement:
This country has enjoyed its longest-ever period of economic growth. Were a business to make a similar boast, you might expect it to have cash in the bank.
Compare it to this statement on the White House website:
Our economy has seen the longest uninterrupted period of job growth on record – 52 months of job growth – but job creation has slowed recently. Consumer spending has been growing, but the housing market is declining. Business investment and exports are still rising, but the cost of imported oil has increased.
It sounds as if the U.S. has been experiencing "economic prosperity". One dictionary definition of "prosperity" states:
prosperity – an economic state of growth with rising profits and full employment
economic condition – the condition of the economyboom – a state of economic prosperity
What seems to have gotten lost in our views of "prosperity" is net worth. In this celebration of "growth" there is no mention of the debt it took to achieve it. The guy in the McMansion with the Hummer and toys may appear prosperous, but if this lifestyle is maintained by debt, it’s bound to come to an end sooner or later. Unsustainable "prosperity" isn’t "prosperity". Isn’t the guy in the modest home and the used car and money in the bank really the more prosperous of the two? Couldn’t the same be said of a nation’s prosperity- that it should be definied by the rising net worth of it’s citizens, and not by profits and employment achieved through massive debt?
Many analysts did not see [or publicly admit that they did, anyway] the housing bust coming, as they focused on demand without watching the buildup of supply- you can’t track market direction without monitoring that balance, and the same can be said of our "economic prosperity". This is why any "stimulus package" won’t work- it doesn’t address this basic imbalance in our new "prosperity" model- if the cost is higher than the benefit, nothing has been added to the bottom line.
True prosperity won’t be achieved until Americans and our government spend less and save more. The Fed is wrong- "the hair of the dog that bit us" isn’t going to save us. Here’s hoping that whomever we get as president [May God have mercy on their soul] will figure this one out. Before we go looking to achieve "economic prosperity", let us first redefine it.
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Prosperity is a function of net worth, not assets. Period.
Well, prosperity sure isn’t debt, that’s for sure. Other than that, it’s mostly semantics.
But this begs larger, more important questions.
Does everyone need to be wealthy, in order to have a viable society?
Is Phoenix the worst example of Smith’s Invisible Hand, or the best example of bad government intervention?
There’s lots to ponder about society…. if you read the polls nowadays… people are finally starting to realize that there’s a problem with society that consumption won’t fix. Libertarianism (as practiced by most Americans) is sliding into the piehole of history. What will replace it?
Who knows. Something that returns the empty suburbs to the desert, while putting money in people’s pockets.
We’ll have plenty of job-free time to talk about this, soon.
Tell a friend.
Yossarian-
I think since our government is now focused on keeping America “prosperous”, just exactly what that means is important.
If our goal is to increase the net worth of Americans, I doubt we’d have “economic stimulus” packages or cheap money to encourage spending and make saving less appealing.
Bless the Republicans in the Senate for slowing down the bailout. [Too bad they can't kill it.] Congress should take the time to consider what policies really make us prosperous in the long run, rather than the pseudo-prosperity of a “bubble”, doomed to pop.
And out of the ashes shall rise the Phoenix. Where there’s smoke there’s fire. It is future generations who will learn from our mistakes and regain prosperity. We’re too far gone. Would someone tell me how the people of this era are going to pay it back. Debt is a shackle that is nearly impossible to shed once clamped on. I see no will, no understanding, no gainful pursuit, no prayer, and most of all no santy claus to save the day. The debt will not miraculously go away. There will be no forgiveness. A score must be settled. There may be blood.
So, should people be housed or shouldn’t they? Yes or no?
The economy is going to continue to decline until that question is answered, Yes.
jryskmpr:
The economy will decline no matter how that question is answered. Housing prices will drop, no matter how much or how little you like it.
It’s all in what you do with the information.
PS – household formation and other ‘housing growth’ statistics have pretty much all peaked.