The debt effect
Chris Laird
The US economy has been run on a debt paradigm since the time of Henry Ford's model T. In the early 1900's, Henry Ford introduced mass production to his car line, and DOUBLED the pay of his auto workers in ONE fell swoop... and the finance industry began a partnership with the US economy which has never looked back. Ford realized that auto workers would be his best customers, and created a virtual perpetual motion machine to buy more and more cars. Immediately after these things, automobiles became ubiquitous in the USA, and rapidly developed to be more powerful and bigger, and a whole generation of car buffs started their Sunday and Saturday touring mania. That lifestyle changed the entire world.
But the introduction of the debt effect to the US economy THEN created all that wealth because 1. people weren't really indebted that much, and 2. The US had a gigantic comparative advantage economically and was blessed with all sorts of natural resources. It was basically a true land of industrial milk and honey.
So, the debt effect could be run a long long time, over many generations in the US, generating real prosperity, and real economic growth and blessings to no less than the whole world....
It is said that there can be too much of a good thing.
Since that time, debt instruments became a fundamental part of the US economy, spreading to house mortgages, (yes that is pretty much new in the 1900's too), and whatever else people wanted.
It is interesting to note that the greatest example of the debt effect principle was the introduction of the personal credit card in the 1960's. And interestingly enough, that time coincided with the first recognized real abuses of the US currency, and saw a time when gold went from about 35 bucks an ounce to, what 800, in 1980?
So why are we now in a state where, only about 30 or 40 years later, since the 1960's, and 1950's, that fairytale time when all was mom and apple pie, and of course hot rods, and fast cars, and a generation that had won a world war on two fronts, European and Pacific, a generation that was DEFINED as optimistic, positive thinkers, winners.
The world changed on a scale that was basically not seen or was not conceivable, even a hundred years earlier, when battle ships had square rig sails, and shot black powder cannons at each other like we see in the movies... And pirates in strange costumes sailing around and attacking ships and stealing women and gold.. and.. well I'm digressing.
This is about the debt effect
Now the pirates are stealing all the paper money.. Instead of being real swashbucklers after gold and women, the new pirates are in business suites, and sailing in a wind of debt, through the sea (that is the peoples of the world).
But the debt induced economy has resulted in the US becoming waterlogged, like a ship with too much money sloshing around in the bilges, over the floorboards, unstable, waiting for some unforeseen puff of wind to capsize it.
As a matter of fact, its not only the US's problem. Japan and the rest of the world has combined easy borrowed money with gigantic promises to their constituents, selling out the future of the young, to garner the vote of the old.... This is truly wicked.
So, the introduction of the debt paradigm, to a vastly rich continent nation, with a relatively unindebted population in the early 1900's, has created a standard of living not even imaginable 100 years ago.
But, too much of a good thing is bad.
How bad? Well, now people grow up EXPECTING this kind of progress, from their youth, as a birth right. This debt induced growth binge, combined with the unlimited progress of the post WW2 generation has created the seeds of its own destruction.
It had to happen
In 1900 there really weren't any home loans to the average citizen . Now every thing is purchasable with debt, from a VCR to cars to homes. But there are plenty of sources to see the monstrous growth of debt in the world economy.
The point is, we progressed from legitimate use of debt to foster real growth, a legitimate debt effect, to one of CONSUMING the future with debt.
Now there is one more point, very important, here. It is not clear the outcome of a collapse of a debt paradigm today. It could be inflationary or deflationary. It could be either because, the way debt works, it is like an airplane that carries the commerce of the world on it, and it has a stall speed.
It is the ability of the economy to sustain a real return to that debt induced money that creates the flow over its wings that keep the plane in the air. If people become unable to keep up the velocity of that cash induced flow, the wings lose lift, and it can happen suddenly, like a stall. Then the velocity of money will stop and the economy will drop.
Both inflation and deflation accomplish this
Inflation accomplishes it by removing the real purchasing power of the paper in circulation faster than it can be infused by printing.
Deflation causes it by just destroying the money floating around
Just because you have needs and wants doesn't mean you can get money. You have to either borrow it or earn it. And if its a deflationary depression that does not work. That is why the government can push all the money out there it wants to, but if people won't take it, or can't take it (by earning it or borrowing it), then things stall.
So, the debate today is not whether there will be a debt induced economic contraction world wide. That is inevitable. The debate is, will it be deflationary or inflationary. Either way, I guarantee you, that the life you used to know is not going to be around much longer.
Chris Laird
3 May 2004
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