Wednesday, August 8, 2012

Credit Masks Low Wages But is Predatory and Ultimately Results in Wealth Transfer from Many to Few

Majia here: It is my contention that our debt-based economy is antithetical to widespread prosperity and economic stability. Credit masks declining living standards temporarily, but ultimately enables a shift in wealth from the many to the few.

To begin, let us consider the decline in household wealth that occurred with the great recession:

Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says

[paraphrasing] In June of 2012 the US Federal Reserve announced that Americans’ wealth plummeted 40 percent from 2007 to 2010. In dollar terms the report argued that the median net worth of US households dropped from $126,400 in 2007 to $77,300 in 2010.

[excerpted] ...The survey showed that fewer families are carrying credit card balances, and those who do have less debt. The median balance dropped 16 percent, from $3,100 in 2007 to $2,600 in 2010..."

Majia here: So, during the great recession Americans lost considerable wealth, particularly in the form of home assets, which are Americans' primary asset.

Americans' debt levels also decreased.

A primary way that debt balances shrank was through defaults.

One would think that a decline in debt levels is a good thing. Think again!

Yesterday, Aug 6, 2012, David Reilly of The Wall Street Journal reported an increase in credit balances. Reilly writes that rising credit balances are usually a good thing:

"A 10th consecutive monthly increase in such credit, which excludes mortgage debt, would show that one of the the economy's main engines is continuing to tick despite concerns consumers have lost confidence" (p. C1)

Majia Here: Reilly is essentially stating that debt creation is a major economic engine in the US.

How can that possibly be a good thing, especially when consumers are not just losing confidence, they are losing the financial capacity to consume?

From Reilly's perspective, debt-creation is good since aggregate demand depends upon it and so economic growth in the US depends upon it.

And much of that growth - i.e. profits - goes to the financial services industry in the form of fees, interest and securitization.

However, in this particular case, Reilly warns that not all debt is created equal and that although 2012 marks a return to the 2008 high of $2.58 trillion in consumer in credit, student debt is "nearing 1 trillion and is now the second-largest form of consumer debt after mortgages."

Reilly claims that "in the short term" student loans "don't juice the economy in the same way as increases in credit card debt."

Excluding student loan debt, outstanding credit is down more than 15% from the 2008 peak.

Majia here: The very premise that debt is necessary for economic growth is at the heart of many of our financial and economic problems.

Although credit is helpful for large purchases such as homes or starting a business, too many Americans use credit to subsidize a lifestyle not possible with their wages.

Credit essentially deflects recognition that many jobs in the US do not offer "living wages."

Furthermore, credit encourages identity formation around consumption, which is represented in terms of democratic consumer choice.

Indebted consumers then become little more than modern indentured servants as they attempt to pay down usurious interest rates and fees that balloon principle.

Wealth is transferred from the many to the few through home foreclosures and other forms of asset seizure due to default.

The rising student loan debacle makes a mockery of the American dream because those who receive these loans cannot be released from their obligations unless they become severely disabled.

Too many universities - particularly the for-profits - have encouraged and/or enabled students to acquire far more debt than they can ever hope to pay back given the dismal job prospects that await them upon graduation.

New graduates best illustrate the problem of debt peonage as they struggle to pay back $30,000 or $40,000 in tuition while working at Starbucks.

Easy credit is a devious charm that pretends to enrich us while ultimately enslaving us.

The banksters who promulgate it are akin to false prophets who promise happiness but offer disappointment and enslavement.



  1. majia,

    I would like to add to a few things in your post.

    First and foremost, the Federal Reserve is lying to the people by saying the wealth is off by 40%.

    It's off by close to 75% and the Federal Reserve is the cause of it!

    Notice they use "dollar value" as a metric. Well, a dollar's buying power isn't constant - as anyone who goes to the gas station or grocery store knows full well.

    What makes prices change? ask an economist and they will say a shift in the balance between demand and supply is what drives it - however a much more important factor is at work - the supply of money. On a personal basis it's how much money is available in my pocket or checking account.

    However on a global basis it's how many dollars are in circulation. Since Tarp was initiated in 2008, the US federal budget deficit has doubled to around 15 Trillion dollars - so the government itself has borrowed money - which presumably needs to be paid back.

    But where did that money come from? China? Japan? who loaned it to us?

    Here's the answer - they printed it! Well, not exactly, there aren't enough printing presses in the world to print that much money in that amount of time - printing money is so old fashioned. They created in a bank database out of thin air! The Fed's database. And it's not even that simple - "they" need to guard against having to be audited by the government (they aren't, you know) - so they don't actually create the money within the Federal Reserve - they have a series of "shadow banks" where they create the money - then they loan it to the Fed, which buys treasuries.

    It' s a complete and utter shell game. Check me on this, please.

    1. So two questions: What does that have to do with wealth? and Where did the money go? Answers:

      By increasing the dollars in circulation, it decreases the value of each individual dollar. They've injected about 30% more money into the system - so every dollar is worth 30% less than before - so your wealth that you thought went down by 40% really went down by 75-80%.

      And the machine isn't slowing down - at some point it's got to stop, but I'm not sure when.

      So where did these 8 Trillion new dollars go? Everywhere. First they went to the owners of the Fed (bankers)- who took their cut. Second, they bailed out the banks - because they were all insolvent immediately after the foreclosure crisis - because banks had spread the risk globally using "derivatives". Third, they went to the banks after the foreclosures in the form of loan guarantees from Fannie and Freddie.

      So the banks got the first three slices of pie. But who got the rest? We did. They've extended unemployment again and again and again - that's tremendously expensive - but the good thing is that poor people, although they don't pay income taxes, they do borrow a lot and pay a disproportionate amount of their income to - the banks!!!

      They also pay taxes in the form of sales taxes and cigarette taxes and gasoline tax.

      A good deal of the money has gone to government spending - which is jobs - defense jobs, homeland security (TSA, NSA, ATF, CIA, Police departments, etc.), roads, buildings, national parks, nuclear industry....

      Have you noticed all the nice new equipment every gov agency has these days? - it's been a virtual free-for all.

      Is it any wonder why are standard of living is falling off a cliff?

      But let me correct one thing - this system is not designed to take from the poor and give to the rich. The poor don't have anything to give. No, it's designed to take from the middle class and give to the rich.

      The most insidious part of the whole thing is that we have a system where there's no account for bad decisions. If a bank is insolvent, the gov bails them out. If a person loses their job, the gov bails them out - not just for a short time - for a long time. If there's no war to fight, we either create one, or spy on our own people. Even if an education is valueless, there's plenty of money for students to attend. We here know that the nuclear industry is a scam - privatize the profits and foist the risks and losses and catastrophes on the public.

      Even if our roads don't need fixing or we don't need new fire engines, we buy them. Bankers are non-value added on the system - they're friction. Homeland security is huge friction in the system. Social programs, although necessary, are friction in the system. Instead of spending more money on teachers, we're spending education dollars on administrators - friction.....

      Is there nobody smart enough to figure this out?


Note: Only a member of this blog may post a comment.