Sunday, April 10, 2016

Econ 101: The Damage is Done During the Boom

The Econ 101 lesson that must be remembered is the damage is done during the boom, not the crash.  The crash is just the unbalanced economy tipping over.  Karen DeCoster caught an excellent example of hegemon interest-rate market distortion in real time:
The auto bubble, with its easy credit and super-low (or no) interest rates guiding the way, has redirected consumers from more affordable small and mid-size cars to the $30k – $40k+ SUVs and pickups that are financed at or near 0% on a 5 – 7 year loan period. In mid-2015, Kelley Blue Book reported that the average new car transaction price had reached $34k. I personally know of individuals who have financed cars that cost at or near 100% of their annual (gross) salary. This is not uncommon, and it is unsustainable.
Here an article on Stockman's site gets started in analysis way too late in the narrative:
Few question the importance of private credit in the global economy. When households and businesses are borrowing to expand production and buy homes, vehicles, etc., the economy expands smartly.
When private credit shrinks–that is, as businesses and households stop borrowing more and start paying down existing debt–the result is at best stagnation and at worst recession or depression.
Stockman usually writes as if the problem started 25 years ago..  well... try 1971.  But to the point, what is the source of that "private credit?'  If it is malcredit, whether private or hegemon, it is every bit as toxic.  Who cares if people use hegemon or "private" malcredit?  It is all damaging.

The private credit that matters is asset based.  That is created between two parties who assume all risk upon themselves.  This benecredit is always pitch-perfect and is limited only by the rational considerations of economic actors.  No hegemon required (which is why the hegemon attacks it.)

We can walk away from this today, but we won't.  We've all assume our tallies show a net positive, when truly they only show the degree to which we are guilty.

Start a business, move over to the side that ameliorates.

 Feel free to forward this by email to three of your friends.


Anonymous said...

An article today in Business Insider says it all, - OBAMA: 'Let's stop rewarding companies that are shipping jobs overseas'.
The question is why are the businesses going overseas if they are being rewarded? Moreover, are businesses being rewarded with malcredit to stay in the U.S.? This sounds alot like crony capitalism and not like the true free-market economy that the late great economist Milton Friedman envisioned.

Anonymous said...

Here's an interview with Milton Friedman on greed...