Tightening the Belt

by Addison Wiggin

Before the demise of the dollar can be arrested, the causes – runaway debt and U.S. government policy – must be addressed. As a personal investor there’s not much you can do but understand the trends in place and position your portfolio for success. You need to understand why prior structural flaws have gotten us to this point. Several things have contributed to this problem, including not only excess credit, but also the lack of savings and investment among American consumers.

A recession is a retreat, a decline in GDP, employment, and trade. Not surprisingly, most people think of such economic forces in terms of lost jobs, which is only one aspect of the bigger picture. But just as recession has an expanded meaning, so does recovery.

In the past, U.S. recessions resulted from tight money and credit. This translates to difficulty in getting loans (especially for homeowners and small businesses). It used to be a symptom of recession that people would say, “Money is tight.”

We rarely hear that anymore. Why? Because money isn’t ever tight these days; it’s just worth less and less. The old-style recession and its accompanying tight money forced consumers and businesses to cut back on borrowing and spending excesses – belt tightening. This change in behavior eventually brought the economy and the financial system back into balance. Cutting back on credit when recession occurs is a form of “economic dieting.” We have to slim down to get away from tight money, so that the economy can get back into those tight jeans it wore last summer. Most of us know exactly what that is like, and what it means.

Something has changed in the United States. Our economy is fast becoming morbidly obese and we have long abandoned the desire to slim down. We just keep buying bigger and bigger expectations. We’ve been living in the bubble.

It has become official economic policy, under Alan Greenspan’s tenure with the Fed, to not only accept but to actually encourage borrowing and spending excesses. This occurs under the respectable label of “wealth-driven” spending.

When we speak at conferences and talk to people around the country we’re consistently surprised at how little people actually know about the money they pack away in their wallets. Since 1913, and the passage of the Federal Reserve Act, the federal government has ceded the power over money expressly given to it by the Constitution to private interests. Article I of our Constitution gives Congress the power to coin money and to regulate its value. But that power has been delegated to the Fed, which is essentially a banking cartel and not part of Congress. This isn’t just politics or stuffy economics. By allowing the Fed to have this power, we have no direct voice in how monetary policy is set, not that it would do much good anyway. The loss of sound money – money backed by a tangible asset, rather than a government process – is the root imbalance that’s plaguing the dollar.

To give you an idea of how the recession and recovery trend has changed, look at the historical numbers – the real numbers and not the political/economic numbers we are being fed.The peak-to-trough changes shown in past recessions make the point: We’re not gaining and losing economic weight and returning to previous health in the same way; something has changed drastically and, like a Florida sinkhole, we’re slowly going under.

That’s why the dollar crisis is invisible. We really don’t want to think about it, and the Fed enables us to ignore it by telling us that all is well. As long as credit card companies keep giving us more cards and increasing our credit limits, why worry? And that, in a nutshell, defines the economic problem behind the demise. An economist would shrug off these changes as cyclical or simply as signs that in the latest recovery a bias toward consumption is affecting outcome. But what does that mean? If, in fact, we are no longer willing to accept tight money as a reality in the down part of the economic cycle, how can we sustain economic growth? How much is going to be enough? And what will happen when seemingly infinite credit and debt excesses finally catch up with us?

[Ed. Note: Addison Wiggin is the editorial director and publisher of The Daily Reckoning. Mr. Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and the upcoming thriller Empire of Debt. Mr. Wiggin is frequent guest on national radio and television programs.

The Daily Reckoning