The power of III

Summum ius summa iniuria--More law, less justice

29 August 2011

The indirect way the Federal Reserve contributes to our debt-slavery

...and undermines Capitalism:

July personal income and expenditures were quite surprising in that while many were expecting the drop in the market to force consumer saving to upshift (lower spending than income), not only was this not true, but expenditures spiked by 1 whole percent from -0.2% to 0.8%, on expectations of 0.5%, even as Personal Income came in line with expectations of 0.3%, up from a revised 0.2% (concurrent with extensive prior data revisions). This was the biggest difference between a monthly change in income and spending since October 209. The net result was a plunge in the savings rate from 5.5% to 5.0%. And while on the surface this would be good news, as in Americans are spending again, a quick look at the PCE components indicates that virtually the entire surge is due to a spike in Energy goods and services. In other words, the entire spike in spending was to... pay for gas and associated energy expenses. Which makes sense: in June this was a drop of -4.5%, it is only logical that the subsequent jump in Brent and WTI forced American savings to drop.

All in all: in July Americans continued to max out their credit cards to pay for gas. As for the income side, transfer payments as a % of spending refuse to budge: thank you Uncle Sam.

link to Zero Hedge post.

No mention of the Federal Reserve above, right?

Here is the bottom line, as understood by the Austrian school of economics:

We can't save money because our expenditures continue to rise as our income is stable or contracting. The squeeze is on. Oil costs no more to produce now than it did before. Commodities like oil and gold tend to go up in price in $ when the dollar is less valuable from the Fed doing their Quatitative Easing (printing digital money not worth the paper it's not printed on, to quote Gerald Celente).

If you can't save, you cannot extract yourself from debt-slavery. If the country cannot save, it cannot use it's capital (i.e. saved wealth) to reinvest in industry to increase the country's productive capacity. That, by the way, is the definition of Capitalism. Keeping an economy going by blowing savings on purchases, by definition, has a finite time in which to do it. Eventually your savings is gone, and you go into hock. Look at chart above during pre 2008 housing bubble. No savings, living off real estate equity. When real estate bubble pops, savings rate has to increase. Individuals realize they must do what their grandparents always said: save for a rainy day, save to invest, save, save save.   I, for one, sooo regret not taking that to heart, even though I knew better.


(Anyone with a more sophisticated grasp of Austrian theory feel free to correct me in the comments.)

1 comment:

  1. Well I took that to heart. Absolutly debt free is my "way" of achieving freedom. But that does not help really because even if I'm not even involved in any debts as creditor or debitor) the deledefs have decided that I have to bear the debts of other countries also. That's the unfortunate truth living here in EURoland....