So What is the Message?

In a conversation, a middle management executive spoke of making over $75,000 a year-and yet his wife had to work to make ends meet. He was up to the hilt in credit card debt and wondered whether the next round of lay-offs at his company might include him.

Americans have gone deeper in debt-from 65 percent to over 95 percent of disposable income. Today, 96 percent of the average American's disposable monthly income has already been spent before he receives his paycheck.

In 1929 there was about 50 cents of debt-total debt for every dollar of Gross National Product (GNP). Today there is about $6 of debt for every dollar of GNP. A twelve-fold increase. This is a good measurement of debt because it is tied to economic production which, of course, generates the money to payoff debt.

1929 is significant because that was the year the U.S. stock market collapsed and the Great Depression began. A couple of years ago Don McAlvaney described the current stock market as being overpriced. The price compared to the earnings was too high; or, in other words, the dividend income that stocks earn in relation to their selling price was too low. In 1929 the stock prices had been driven to high levels by a speculating frenzy with the result that dividends or earning power was comparatively very low.

So what is the message? Try to keep your personal debt low in relation to your income and job stability. Also vote for those who are really serious about bringing government expenditures under control. Let them know!

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The Economy - Who is to Credit? Who is to Blame?

The founder of the Austrian School of Economics, Ludwig von Mises, stated, "The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions.

"He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse.

"In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about."

(Ludwig von Mises Economist, Investment Rarities)

Government Crisis/Economic Turndown

Some students of economic conditions feel the deterioration in government finances at the federal, state, and local level is frightening. Tax revenues have fallen and government expenditures continue to rise. Now, throw in the possibility, in some economic downturn, of the Federal Government being forced to pay on multiple financial guarantees, such as insurance claims for busted pensions and bank failures.

Add to that the rising costs for unemployment, welfare and early retirements. Some feel hard times are coming, not just for the people and for business, but also for the government. For you as an individual, it is time for wise debt management.

"Expansion of Credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression." (Ludwig von Mises) This is because booms create excesses that eventually are corrected by economic reality, i.e. adjustments in debt, building, and employment contractions, etc.

Booms and Recessions

While oversimplified, we can easily say that a rising standard of living comes from increased productivity-that is, more produced per hour worked.

Booms occur for at least two reasons. One, from a significant increase in productivity which is then often followed by item two, a state of over optimism-leading to broad-based speculation where the value of things (stocks) is bid up and up-thus going beyond the historically accepted returns on investment; i.e. the price-earnings (PE) ratio.

Speculators ignore low earnings and pin their hopes on future prices and values being much higher. Speculation is fueled by either savings or by easy credit. Today people are even borrowing on their home equity.

Booms usually lead to over building, over spending, too much debt, etc. and are followed by periods of adjusting the excesses, which we call recessions and depressions. This is an unemotional, matter-of-fact statement of an economic fact. However, the reality of a serious economic downturn comes with serious pain for the nation in general and for unemployed and unprepared individuals specifically. The belief by some is that small corrections (small pain) now will avoid much larger corrections (large pain) later. The Great Depression is also referred to as "the crash."

In the 1980s, reductions in the taxation rate began an increase in economic activity. People had more money to spend. This in turn increased profits and wages-and the amount of taxes collected increased.

In the 1990s there began a speculative fever that led to economist, Dr. Richebacher, saying, "The U.S. economy of the 1990s ranks as the worst bubble economy [boom] in history...A vanishing supply of domestic savings was more than subsidized by boundless credit creation. . . "

The Federal Reserve Bank has the ability to expand or restrict credit. Richebacher continues, "The power of the American credit machine to create credit out of the blue is unique and unprecedented." Too much easy credit over the last few years has led to, not only too much consumer debt, but also to too much business debt. The increasing numbers of bankruptcies in these so-called "good times" have become a serious matter.

Image: graur razvan ionut / FreeDigitalPhotos.net

Going just back to 1992, consumer-type credit, as a percentage of disposable personal income, stood close to 16 percent. Today it is over 25 percent. And that means an overwhelming majority of people's discretionary income today goes towards interest. and paying down debts.

These are averages and many people are so far in debt they can't keep up. Some are able to refinance and consolidate. From this, some learn financial discipline, but still others do not. "This downturn differs dramatically from all previous postwar recessions. It has not been brought about by tight money, but by unsustainable spending excesses..." (Dr. Kurt Richencache)

The American Savings and Debt Crisis

James Cook, President of Investment Rarities and widely read author, writes about the American savings and debt crisis. "Without savings there would have been no Babylon or Rome. Without savings there would be no automobiles or Motown, no stock exchange or Manhattan, no movie-makers or Hollywood. High savings rates are the hallmark of prosperous countries, dominant cultures and successful people."

Image: Boaz Yiftach / FreeDigitalPhotos.net

In America, where government intervention reigns supreme, savings are under attack.  Transfer payments and social programs erode the will to save. Inflation discourages savings.  High taxes on large incomes reduce the ability to save. Low interest rates make savings unrewarding. Taxing earnings once, and then again when they bear interest, reduces savings.  Rising asset values, brought on by easy money and credit, channel money away from savings into tangibles and speculation.

Today's economic leaders have totally failed to understand the role of savings and capital accumulation in improving the economy. If people do not consume their entire incomes, this surplus can be invested to increase the amount of tools, equipment, plants and facilities that produce goods. Restricting consumption has always been the formula for growth and prosperity. It should be the government's role to encourage this process rather than to impede it.

"In a balanced economy, the money that people save is a real source that can be loaned out to borrowers for constructive purposes. New savings provide an equal amount of new credit. But, in this country, credit exceeds savings by 700 percent."

Prominent publisher, Bill Bonner, states, "Inflating, capital consumption, government intervention, low savings, and overwhelming indebtedness are not the path to prosperity. They are the road to economic destruction and financial perdition." He continues, "Real prosperity results not from consumption, but from its opposite-forbearance. It is that capital, the consumer savings, that determines how quickly a society gets rich."