by Charles Hugh Smith
The game of enabling more debt by lowering interest rates and loosening lending standards is coming to an end.
If we define Christmas as consumer spending going up while earnings are going down, 2015 will be the last Christmas in America for a long time to come. In broad brush, Christmas (along with all other consumer spending) has been funded by financialization, i.e. debt and leverage, not by increased earnings.
The primary financial trick that’s propped up the “recovery” for seven years is piling more debt on stagnating incomes. How does this magic work? Lower interest rates.
In a healthy economy, households earn more money (after adjusting for inflation, a.k.a. loss of purchasing power), and the increased earnings enable households to save, spend and borrow more.
In an unhealthy, doomed-to-implode economy, earnings are declining, and central banks enable more borrowing by lowering interest rates to zero and loosening lending standards so anyone who can fog a mirror can buy a new pickup truck with a subprime auto loan.
The problem with financialization is that it eventually runs out of oxygen. As earnings decline, eventually there’s no more income to support more debt. And once debt stops expanding, the economy doesn’t just stagnate, it implodes, because the entire ramshackle con game of financialization requires a steady increase in debt and leverage to keep from crashing.
The trickery of substituting financialization for earned income–the trickery that fueled the last seven years of “recovery”–is exhausted.
The incomes of even the most educated workers are going nowhere, while the earnings of the bottom 90% are sliding:
Wages as a percentage of gross domestic product (GDP) have been declining for decades. Note the diminishing returns on financialization and asset bubbles that always bust: wages blip up in the bubble and then crash to new lows when the bubble bursts:
Look at how debt has soared while GDP has essentially flatlined. This is diminishing returns writ large: we have to pile on ever-increasing mountains of debt just to keep GDP from going negative.
This dependence on debt for “growth” leaves the economy exquisitely sensitive to any decline in debt growth. The slightest drop in debt growth in the Global Financial Meltdown almost collapsed the entire global economy:
The essential fuel of “growth”–credit expansion–is rolling over:
Even the vaunted prop under a soaring stock market, corporate profits, are rolling over as the stronger dollar and stagnating sales pressure profits:
The game of enabling more debt by lowering interest rates and loosening lending standards is coming to an end. Debt is not a sustainable substitute for income, and households are increasingly finding themselves in two camps: those who can no longer afford to borrow and spend, and those who recognize that going in to debt to support spending is a fool’s path to poverty and insolvency.
Say good-bye to Christmas, America, and debt-based spending in general–except, of course, for the federal government, which can always borrow another couple trillion dollars on the backs of our grandchildren.