“How Are People Paying for This Shopping Spree?”

“How are people paying for this shopping spree?”

Here market analyst Michael Maharrey makes indirect reference to the “strong” economy presently in existence.

And we are assured this economy bulges with the highly striated musculature of a he-man.

MarketWatch, for example, informs us that:

”Mortgage Rates Rise Again on Signs of Strong Economy”…

No less an authority than The New York Times exults that:

The economy continued to run hot in January. Despite high-profile layoffs at big technology firms like Meta and Microsoft, employers in the United States continued to hire at a rapid clip, consumers kept spending and prices continued to rise briskly at the start of the year across an array of goods and services.

All those data points suggest that the economy retains significant vigor, even after a year of rapid policy adjustments aimed at cooling down the economy.

Meantime, Reuters asks and answers its own question:

“What Recession? Strong Economy Buoys U.S. Stocks”…

Here we cite but some examples. Yet to return to our original question:

“How are people paying for this shopping spree?”

Answer shortly. First we look in on the site of another shopping spree, at least until recently — Wall Street…

A Ho-Hum Day for Markets

The Dow Jones Industrial Average posted a 108-point advance today. The S&P 500 went 21 points forward. The Nasdaq Composite, meantime, pushed ahead 83 points.

Gold went $11.50 backward, oil went $1.64 forward.

Bitcoin — should it concern you — presently trades $156 higher than it did at trading’s onset.

In all, a day of little event or consequence.

Yet once again, we must revisit today’s central question:

“How are people paying for this shopping spree?”

The Answer

The abovesaid Michael Maharrey gives a very plausible accounting:

As it turns out, they’re putting a lot of this spending on credit cards.

Even with a big 1.8% decline in retail sales in December, revolving credit, primarily reflecting credit card debt, grew by another $7.2 billion that month, a 7.3% increase.

To put the numbers into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that Americans are still heavily relying on credit cards to make ends meet.

In brief, people cannot afford this shopping spree. More:

Clearly, this isn’t a sign of a healthy economy. Americans are spending more on everything thanks to rampant price inflation that doesn’t appear to be waning, and they’re relying on credit cards to do it. Saving has plunged. This isn’t a sound economic foundation, and it isn’t even sustainable. Credit cards have a nasty thing called a limit. And with credit card interest rates at record-high levels, people will reach those limits pretty quickly.

Not a Sustainable Trajectory

We fear this fellow strikes bull’s eye — “people will reach those limits pretty quickly.” Concludes Mr. Maharrey:

American consumers continue to “support the economy” by spending money today despite rising prices. But they’re borrowing to do it. Tomorrow is fast approaching. And with it depleted savings, higher interest rates and looming credit card limits. This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it.

Since the Great Financial Crisis the monetary and fiscal authorities have conjured over $43 trillion from the great void of nothingness.

Over the 24 pandemic months alone, the Federal Reserve plucked — from the same vast void — 50% more dollars than all dollars that ever existed in 246 previous years of American history.

Can you imagine? How do you like it?

Each of these dollars are representations of debt… as are all dollars under the present monetary arrangement.

In all, the United States groans and gutters under $92 trillion of debt, public and private combined.

As the overloaded pack mule cannot push along, the economy cannot push along under this impossible burden.

The buckling legs are unequal to the load.

The Broken Keynesian Multiplier

Since the aforesaid Great Financial Crisis the United States economy has expanded a cumulative $4.05 trillion.

That is, the economy can boast only $4.05 trillion of growth for the $43 trillion of debt it has taken aboard.

That is, each dollar of growth required nearly $11 of debt-financed “stimulus.”

And so the Keynesian “multiplier” — the promised miracle of water into wine — is reduced to a sad, sad jest.

The miracle of water into wine yields vinegar.

And the miracle multiplier has been proven the false magic of a false prophet.

No Free Lunch, Sorry

Yet when the pandemic flattened the economy in 2020 the federal government spewed trillions and trillions of dollars in relief.

The previous decade’s experience of inflation-free QE instructed policymakers that inflation was a phantom menace — and that interest rates would remain caged — regardless of their lovely fling at the printing press.

But the iron laws of economics will reimpose themselves in time.

The free lunch has no existence. Soon or late the bill comes slamming upon the table.

And honest lunching will demand a square accounting. That time may well be now.

That is, the era of “free-lunch economics” may be through.

End of a Fantasy

Mr. Brian Riedl, senior fellow with the Manhattan Institute:

We may soon look back on the 2009–2021 period as the era of “free-lunch economics,” when hubristic politicians and economists declared that traditional fiscal and monetary trade-offs no longer existed in any meaningful form. Advocates portrayed a new economy liberated from restraints, one in which money-supply expansions and congressional deficit spending could finance benefits that would make even Western Europeans envious, with no economic drawbacks. As in foreign policy, this utopian vision proved to be an illusion. Reality has intruded…

With Washington already facing $112 trillion in baseline deficits over the next three decades, adding trillions more in unfinanced benefits was never realistic. Congress must come back to reality: There is no free lunch.

Prior even to the pandemic, the Congressional Budget Office estimated Congress would need to hack the budget 10% per year.

The budget hackings, twinned with tax hikes, were the only route back to fiscal health.

Can you imagine Congress spending 10% less money each year? As we have written before:

The pig in his sty will first sprout wings and take to the aerial ways.

Nor will Congress raise the necessary funds to keep the show going.

A Grim Lesson in Negative Compounding Interest

Thus debt — already a millstone heavy upon the neck — will weigh more and more.

It will form an impossible drag upon growth.

One year or two years upon the hamster wheel, with little to no growth — even minus growth — are endurable.

Yet multiply the business by five years, 10 years, 20 years or more.

You will acquire a grim lesson in the meaning of compounding interest — negative compounding interest.

If America does not lick its debt, it is a lesson it will learn plenty good… and plenty hard…

The Daily Reckoning