Since the financial meltdown of 2008, we’ve heard numerous salesmen disguised as economists predict that financial Armageddon is just around the corner. I, too, fell for the propaganda at a time when my knowledge of the economy and financial system was weak. This was years ago and of course I’ve had time to correct my evils. Since I’ve done that, I’m gonna debunk a lot of the doom and gloom predictions that you’ve most likely heard in the media.
First off, let me say this — I’m not saying that everything is rosey economically. Obviously there are problems (which I will outline) but not to the extent that many claim. What’s disturbing is that many of these prognosticators of economic catastrophe never really address the real issue(s). Why? Because they’re mostly propagandists for those that benefit from the system as it currently functions.
The first of these prognosticators you’re going to hear are the gold bugs. These are the people who believe that if the U.S. adopted a gold standard, that our economic problems will magically disappear. It’s obvious that these people haven’t done their homework because if they had, they’d see that gold usually brings despair to nations in which it is used as money. Returning to a gold standard would do nothing but cause massive deflation and would practically annihilate the poor and middle class. Contrary to what many believe, gold only benefits the rich. How? Because there’s never enough of it to facilitate trade in an economy and the few who happen to have gold will have all of the power. For this reason, amongst many others, you have to be careful of those that encourage you to buy gold. They usually don’t know what they’re talking about and are only salesmen. Here’s what you have to ask yourself: If paper money is as worthless as they claim and that gold is the real money, then why are they selling their gold in order to get the so-called worthless money? On top of that, we were on a gold standard during The Great Depression and every other period in which there were crashes nearly every decade.
Now that I’ve briefed you on the first crowd, let’s get to the real matter.
There are many well trained economists who promote the idea of a coming collapse of the American economy. Unfortunately, these well-meaning people are usually ignorant of the credit/debt cycle. If one can simply understand how this cycle works, they can see through the fear mongering that takes place in the media. To simplify it, put it this way — during the beginning of a cycle, citizens and businesses borrow money (actually, credit) in order to either expand their businesses, better themselves in some way and there are those that borrow credit for wasteful purposes. What you have to understand, however, is that America operates through a credit system, not a money system. More than 90% of our money is actually credit. This credit is created (out of thin air) whenever loans are made by banks. That being said, when there is a credit expansion, the economy expands as well because there’s more money flowing through the system which ramps up production, making jobs plentiful and people are able to spend in order to keep the economy booming. This phase usually lasts about 6-8 years. After the 6-8 year period, inflation becomes a concern and once inflation becomes a concern, the Federal Reserve steps in and raises interest rates in order to cool down the economy…bringing on a recession. When inflation is no longer a threat, the Fed then lowers interest rates in order to stimulate the economy.
The process described above repeats itself over and over again for many decades until the economy reaches a point where debt burdens become so large that they can no longer be sustained. This is when an economy begins to go through a deleveraging, which occurs every 75-80 years. This is when banks begin to call loans and people either have to pay or lose their assets. What we faced in 2008 was a deleveraging, so was the Crash of 1929. Why are deleveragings so brutal for an economy such as the ones of 08 and 1929? Remember what I said earlier about credit making up over 90% of our money supply. The balance of cash-to-credit is so disproportionate that it is impossible for everyone to pay off their debts. In other words, if there’s $51 Trillion in credit and only $3 Trillion in cash floating around, there’s not enough money in the system for everyone to pay their debts. Not only that, with credit evaporating, the value of people’s assets begin to fall as well (deflation). So, if people were to try to sell their assets to pay their debts, that still wouldn’t be enough. When this imbalance of credit/cash occurs during a deleveraging, a depression follows. A depression is different from a recession, btw. A recession can be remedied by simply lowering interest rates but with a depression, its not so simple. I’m not gonna get into the intricate details of how depressions have been remedied historically, I just wanted to explain the credit cycle so that you can understand what is the most important concept of the economy.
Taking everything that has been stated, lets now debunk the doom and gloom prognosticators.
First off, their timing for a major crash is way off. As I type this, we are 6 years into the economic recovery. It’s reasonable to expect a recession at this point if the economy overheats but not a depression. We are only 6 years into the releveraging phase of the credit cycle, so we haven’t even had time to accumulate the type of debt that would bring on a depression. Some argue that there is lots of toxic debt floating around from the 08 deleveraging, and that is true. However, a lot of that debt is being either restructured or forgiven. Then there is government debt which they claim is going to collapse the American economy. Their cause for concern in this arena is fully justified when one understands how the banking system works. What this crowd fails to understand is that the government won’t default on their debts for a long time, at least not in our lifetime, because they can always borrow the money from The Federal Reserve. Now…The Fed loans money to the government at interest BUT that is unlikely to cause a depression while any of us are alive. I do agree that it’s be an issue one day but not anytime soon.
Conclusion: There are short-term recessions which occur when The Fed fears that inflation is a threat which is usually remedied by lowering interest rates. You can usually anticipate a recession by keeping an eye on inflation. When inflation is a threat, that usually means that there’s little room for the economy to grow and a recession cures that quickly. When you begin to hear about full employment, production running at a really high level, etc., you know that a recession isn’t that far away. What causes depressions is the long-term accumulation of debt through credit and a contraction of credit without enough money in the system to service that debt. When you see credit drying up, that’s when you should be concerned. As previously mentioned, this occurs usually every 70-80 years. Therefore, we don’t to worry about a depression taking place because we are only 6 years into a new credit cycle. Of course the workings of the economy and the credit cycle is more complex than I’ve stated, but you should have an idea why those who forecast doom and gloom are either salesmen or plain ole uninformed.