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More Debt is Proof that Economy Is Recovering?

by on February 7, 2011

The Wall-Street Journal reports today that consumer credit-card debt increased for the first time since 2008. They paint this evidence as positive news for the economy because it means consumers are beginning to spend again. It means that consumer confidence is rising. The Journal also reports that the savings-rate decreased in December.

Apologies if I sound negative, but seriously this is not evidence that a meaningful recovery is underway. Part of the problem in the run up to the crash of ’08 was that consumers, businesses and government had taken on too much debt.

The savings rate was negative during parts of 2005 and through 2006 which is a sign that consumers were eating into the capital stock of the nation, not adding to it. More capital= greater productivity=higher real wages. A recovery built on more debt is a house of cards. It isn’t healthy or sustainable. Thanks to the Fed’s policy of lowering short-term and long-term interest rates consumers, businesses and government are once again taking on large amounts of debt instead of paying down the debt previously accumulated.

The Wall Street Journal had an op-ed I read some months ago that discussed the state of our capital stock and the lack of savings that has contributed to a declining capital structure. I tried looking for it briefly but wasn’t successful. If I find it I will post it here. At any rate, the op-ed basically makes the point that due to our reliance on debt we have been eating into our stock of capital rather than adding to it. This has resulted in lower productivity. Only by increasing our savings can we increase our productivity and raise the demand for labor in a sustainable way.

In other words, a debt-based recovery is a mirage that we are destined to eventually see through. When that day comes- and it will- it won’t be pretty.

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From → Economics

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