September 18, 2009

The Con Game

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , at 5:17 PM by Robert Barone

I was watching Chris Matthews on MSNBC on Tuesday September 15th, and was struck by the discussion group’s commentary.  In essence, the group believed that the current economic environment was ready to improve as soon as “the folks” regained their confidence.  While I do understand that a positive mindset can help keep people from hoarding their paychecks, I also understand the real world. 

In order for people to spend more money, they have to have money to spend.   While this sounds ridiculously obvious, let’s break it down. 

 Median Household

 Here is a chart from the Government’s Census Bureau (http://www.census.gov/prod/2009pubs/p60-236.pdf, Table 1, Figure 1).   First, we can see that despite a lot of cheerleading from both political parties, we haven’t done much to address income inequalities among Americans of differing backgrounds.  Second, we can clearly see that inflation adjusted incomes have not grown since the late 1990’s.  It doesn’t take a genius to see that it will take more than confidence to solve this problem.

Now, as our incomes have stagnated, and most recently declined, our debt burdens have grown.  Let’s take a look.  According to the Federal Reserve (http://www.federalreserve.gov/releases/g19/hist/cc_hist_mt.txt), total consumer credit outstanding in January of 1999 was $1,441,928,000.63.  In July of 2009, that same number had reached $2,457,553,000.71.   To clarify, consumer debt is up a whopping 70%, while incomes have remained flat. 

The talking heads would have us believe that we just need to be confident and spend money to get this recovery back on track.  There is no structural problem in the economy, only a lack of belief in the next great boom that is right around the corner. As our incomes are going down, we are told to take on more debt.  Remember, the Government has spent trillions of dollars that we will have to pay back in order to shore up the nation’s banks.  These banks are then supposed to loan us money to revive the economy.  Think this through.  We have been forced to take on debt, to help banks, so that they offer us more debt.  Meanwhile our personal debt has grown 70% and our incomes are flat. How is more debt going to solve a problem caused by too much debt? 

Keep in mind, foreclosures keep on hitting record highs.  Delinquent credit payments are also at record highs.   If people can’t afford their monthly payments, then it is logical to assume that they don’t have extra money to spend. 

The reality is that the economy won’t be healthy until the deleveraging process is complete.  It has just begun.  The deficit spending both prolongs the process and makes it worse.

According to Chris Matthews and the MSNBC talking heads, the solution to our problem is to regain confidence and take on more debt to spend on clothes, cars, and entertainment.  Responsible people wouldn’t give this advice to a friend or co-worker, so why are the talking heads giving it to all of us?

Matt Marcewicz

 

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778 
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1 Comment »

  1. Christina Ciborowski said,

    To have debt or not to have debt.

    The question raised by Mr. Marcewicz is essential for what we face.

    Product for products sake. Money becoming relgion it’s opium to the people.

    We work, we earn, we spend. But why?

    Money doesn’t equal quality. And quality is what people need to understand.

    Quality products and less is more.

    Denmark says hello.

    Good evening to you all.

    Cibo


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