Nursing an Addiction to Cheap Credit

We’ll float around, and hang out on clouds,
Then we’ll come down, and have a hangover

– Kurt Cobain, “Dumb”

It is often said that the first step to recovery is admitting you have a problem. “Denial is not just a river in Egypt,” goes the old saw. Addicts will contest that it is, of course…further proving the point.

Some addicts manage to maintain what is known (mostly only to them) as a “functioning addiction,” meaning they are able to perform day to day tasks under the influence of their object of addiction. Others, including the myriad, over-romanticized league of artists who fall victim to substance abuse, never really recognize their condition for what it is. And still others, like the gentleman who provided today’s opening quote, become so frightened/defeated when they examine their addiction closely, they promptly stuff the barrel of a 22-gauge shotgun down their throat and end it all there and then.

It is no secret to readers of these pages that the U.S. economy has spent the better part of the last two decades nursing a robust addiction to cheap credit. On a few occasions it looked as though the economy might be forced to kick its filthy habit, to pay back what it owed and start afresh. But whenever things got a tad tough– say, in the long nights of 2001-‘02, when the market was desperately trying to correct itself and “go straight” – the Federal Reserve was waiting in the alley with an irresistible vial of the good stuff.

Now things have come to a head. Other members of the international community, particularly those with significant investments in the U.S., look disapprovingly at what America is doing to itself, in particular, its flagrant currency abuse. China, for one, has begun staging an embarrassingly public intervention of sorts, urging America to control itself and stop freebasing/debasing its currency.

Will the credit-addled child keep its promise and execute its “exit strategy” before the 22-gauge begins to appear better than sobriety? Only time will tell.

As for consumers, they’ve already been forced into a kind of compulsory withdrawal. As noted economist, Gary Shilling, president of A. Gary Shilling & Co., explained to Bloomberg earlier this week:

“Consumers simply have no borrowing power, so they have no choice but to retrench and, as they retrench of course that pushes the economy down…they’re 70% of GDP, they retrench, [so there is] less spending, less need for goods, less need to employ people, layoffs, more waste cuts, etcetera. It’s a vicious circle.”

But what about all that stimulus out there on the street, folks say. Ain’t that helping to sate the cravings?

“The fiscal stimulus so far is doing nothing,” Mr. Shilling continued. “The administration can’t come out and say spend, spend, spend…but why pump out all this fiscal stimulus if they don’t expect people to spend it? He [President Obama] wants to get that money out faster but, the point is now people are simply saving it…they’re doing what they haven’t done in 25 years: they’re going on a savings spree.”

What of the great consumer economy when the consumers economize? we wonder.

Our guess is that businesses that rely on the sale of expendable items will continue to suffer, while tightly managed outfits with sound cash flow that are based on providing necessary goods and services will thrive.

The Daily Reckoning