When the Borrowers Stop Borrowing

The Dow moved up 17 points on Friday, leaving it above the 10,000 mark. Gold rose too – it is at a new record high, only $5 below $1,100.

According to the news reports, the US economy is ‘growing’ again. Yes, that’s the official storyline.

But wait, what kind of growth is this? David Rosenberg:

“All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.”

The quacks at the Fed and the Treasury department have delivered the biggest jolt of adrenaline in history. People in the private sector won’t spend? Heck, the feds will spend for them!

It took the Fed nearly one hundred years to grow its balance sheet – which is the foundation of the US money supply – to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet…to more than $1.8 trillion.

Early last week, the Fed announced that it would keep the firehose-sized IV in place. Then, by the end of the week, the G-20 meeting of finance ministers confirmed said they were all sticking with their stimulus programs.

You can’t put that much cash into a financial system without getting some kind of reaction. Goldman is making record profits, for example. How does Goldman make money? It is finance business. It profits by offering credit. When credit expands, the moneylenders and speculators at Goldman make money.

The private sector isn’t borrowing. Every day brings more proof.

Consumer credit contracted again in September – the 8th month this year.

Unemployment just passed the 10% mark, reports The New York Times.

“Small Businesses Hunker Down to Survive,” says another headline story.

Another big bank went bust in California.

But while the private sector de-leverages, the public sector expands. Now, it’s the feds who are doing the borrowing – about $1.7 trillion this year.

This is great for the people who help the feds finance their spending. But all it does is add more debt to the system. And debt is the real problem.

If former OMB director David Stockman is right, we’ll see deficits over $2 trillion for a decade.

What people once took for absurd they now take for granted. Such as trillion-dollar deficits. For even with a hole in public finances equal to 13% of GDP the US House of Representatives passed a law overhauling the health care system, at a cost of more than $1 trillion.

What were they thinking?

Well, they were probably thinking that ‘deficits don’t matter.’ And they were probably justifying the expense on the grounds that it was ‘countercyclical spending’ that would help pull the US out of its slump.

Whatever they were thinking, they weren’t remembering what happened 20 years ago. It was 20 years ago today that the Berlin Wall fell, bringing to an end a 40-year demonstration project. The East Germans/Soviets wanted to show the world how well economists working for the government could run an economy.

And we found out!