The mission (of Bernanke and Geither) is clear: to convince the world of two things at the same time… both impossible and mutually exclusive! The Chinese vigilantes must believe that the feds wonâ??t undermine the dollar… and the rest of the world must believe that they will! Inflation is necessary for recovery and growth in the US… or so everyone believes.
It was French economist Jacques Rueff who revealed the scam more than half a century ago. The whole idea of Keynesian stimulus, he explained, was to cause inflation… which would reduce the real price of labour. In a modern democracy, politics prevents wages from falling. But in a correction, if wages donâ??t fall people donâ??t get jobs. Keynesâ?? didnâ??t mention it, but the only reason his stimulus works is because it pulls the wool over the eyes of the working classes â?? reducing their wages by inflation so employers can afford to hire them again. Ergo, no inflation… no recovery in the job market. No recovery in the job market… no recovery in the economy.
But inflation will cost the Chinese plenty. And theyâ??ve let it be known they wonâ??t sit still for it. Geithner promised a â??durable recovery led by private demand.â?? In other words, it wonâ??t be government spending that pulls the US out of its slump, he told the Chinese.
Stimulus will not produce genuine prosperity. You canâ??t cure a credit-caused crisis by offering more credit; it just wonâ??t work. But rather than let the system correct itself, the feds are determined to â??do something!â?? What can they do? They can only destroy the dollar â?? or try to â?? thereby destroying the value of Chinaâ??s $1.5 trillion treasure.
Now, why private demand is going to weaken, not increaseâ?¦ As the boom of the post-war period continued, consumer spending played a larger and larger role in the economy. It averaged 64% of the GDP during most of the period, but increased to 70% in 2007. Likewise, debt service as a percentage of disposable personal income rose too â?? from less than 5% in the â??50s and â??60s to over 14% now. If, as we suspect, the trend towards more and more consumer debt has finally peaked out; consumption should have peaked out too. We should now see the percentage of the economy devoted to consumption go down… year after year… until it reaches the â??normalâ?? level. Private debt too should go down, until it is at a more â??normalâ?? level.
We calculated that, during the last 7 years of the Bubble Epoque, consumers added $1.4 trillion in debt per year. That was the spending that made the old mare go. But now what? They are now adding no debt â?? zero. In fact, they are paying off debt. This alone removed $1.4 trillion in private demand from the economy. The only thing that would cause consumer spending to go would be a substantial increase in real wages. This would allow Americans to buy more â?? while simultaneously paying down debt. But it will be a long time before real wages increase at all… let alone substantially.
Bill Bonner Daily Reckoning
