Recent statistics out from lenders, credit card companies, and mortgage service agencies show that consumers are still having a tough time paying bills but that credit card debt balances are lower than they were 3 years ago.
Capital One reported that delinquencies and charge offs are roughly the same month over month from December to January (read HERE) so that even in light of job losses, consumers are cutting back spending and paying off debts – as they should. The great lesson from this mess should be prudence. Prudence means saving and investing – which in turn provides capital for investment which helps business formation and growth which develops new jobs.
The American style of the past 30 years or more, that of stimulating demand by borrowing money we don’t have to buy things now, has gotten us into trouble. Unfortunately, as opposed to the average citizen who is acting rationally by paying down debts and controlling spending (though it be forcefully in some respects), government is behaving most irrationally by spending and borrowing more to try to “spend” our way out of recession. As Jim Rogers says, “the idea that you can solve a problem of too much borrowing and too much spending with MORE borrowing and more spending (Keynesian thinking) is ludicrous.”
If you want more color on the Keynes vs saving/investment/free markets debate, watch the video from my previous post “Keynes vs Hayek” (see side list of recent posts).
As we have discussed before on this site, focusing on consumption gives the economy a quick fix, a boost, and makes people feel that things are improving (like the bailouts of 2008-09), but getting drunk on over stimulus leads to later pain and just delaying the problem. Investment creates slower growth, often too slow for the average politician’s political life (House terms are only 2 years), but it creates REAL, LASTING growth that supports itself. Take some time to learn about this other perspective – if you are particularly nerdy, go to the Mises Institute’s website Here: www.mises.org. Ludwig Von Mises comes from the Austrian School of economics which counts Mises and F.A. Hayek among others as critical contributors. Keynes has dominated the 20th century, a century in which Austrian school thinking of patience and investment was often disregarded. perhaps it is finally time, now that we are all drunk from too much C+G (Keynes broke down Spending in terms of Consumption, Investment, & Government – C+I+G), to reconsider.
I have been recently adding Austrian thinkers to my list of reading – intuitively it makes sense to me, now I will delve into the academics of it and test my thinking. Join me on this journey if you like, however I think it will be a long road of study!
For a good outline of Keynesianism, try HERE
Just got wind of this – great article from Niall Ferguson regarding government spending. Here’s a quote from hsi great FT article:
“What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect”