The Lehmann
Letter (SM)
You can't simultaneously
cut back and spend more. Cutting back will ease the balance-sheet crisis and
spending more will speed recovery. But you can't cut back and spend more at the
same time.
Much of the
United States and Europe – households, banks and governments - faces a balance
sheet crisis: Shaky assets, depleted liquidity, too much debt and too little
net worth. The evidence is all around us: Homes underwater, credit-rating
downgrades and insolvent governments.
We all know
the solution: Pay your debts, tighten your belt, spend less, be frugal, curtail
borrowing, blah blah blah. OK, suppose we do that. Then what?
Private
Borrowing
(Click on chart to enlarge)
(Recessions
shaded)
Let's begin
with the United States. As you can see from the chart, the private sector - households
and businesses - cut back sharply as recession unfolded. Borrowing plunged
until the private sector began repaying its debts rather than borrowing more.
That was the first time this has occurred since World War II.
Looks good - and
it is - until you begin contemplating the consequences. In a report released
this month, the Federal Reserve reported that private sector borrowing (households
and business) had fallen from $574.4 billion in 2011's fourth-quarter to $564.6
billion in 2012's first quarter.
“D.2 Credit Market Borrowing by Sector”
Now that
private-sector borrowing is only one fourth of what it was before recession hit
(see chart), ask yourself: "How are households going to buy all the homes
and cars required to hasten economic expansion?" They can't do it without
borrowing and they can't repair their balance sheets if they do borrow. We're
in a jam.
There is no
easy exit from this predicament. Cutting back will ease the balance-sheet crisis
and spending more will speed recovery. But you can't cut back and spend more at
the same time.
(To be fully
informed visit http://www.beyourowneconomist.com/)
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