A House of Cards?

The Fed reported yesterday that consumer credit rose 6.4% in May, the biggest increase in credit card debt in six months. Why are so many people turning to the tab to finance their lives?

One could cite a variety of reasons: convenience, consumerism, materialism, and so forth. But there is a darker truth. Even without all of these other things, our economy would still require vast sums of credit to keep the average household afloat, and the economy with it. The problem is the vast inequality in pay and wealth. When wealth concentrates at the top, then there is simply not enough purchasing power in the mass of men and women to clear the markets of all the goods that are produced. This purchasing power has to be re-cycled in some way, or consumer markets will simply fail, and with it, the economy. The major way of re-cycling purchasing power has come to be consumer credit.

However, such credit is a trap. It does save the economy from short-term distress, but only at the expense of guaranteeing its eventual collapse. We can increase demand by a borrowed dollar today only be decreasing demand by that same dollar--plus interest--tomorrow. And the interest rates are, as everyone knows, astounding. This has two effects. first, it further concentrates income and wealth at the top, which in turn necessitates an ever-greater influx of lending to the middle and lower income groups, which further concentrates wealth at the top, etc., leading to a vicious cycle,

The second effect is that consumer credit competes with the capital available for business expansion--for the creation of new jobs and products. Think about it: would you rather lend to a business that will return 10% on your money, or to a consumer who will pay 15%, 20%, 25% or even more? Thus the supply of capital is limited by the need to finance consumption.

An economy built on consumer credit (which in more sensible ages was called "usury") may appear to be strong, but in fact it is, quite literally, a house of cards--credit cards. All the statistics about the health of the economy are meaningless if they do not offset for the amount of activity financed by non-productive debt (i.e., consumer credit). This is simply a matter of proper accounting; one has to show not just the assets, but the liabilities as well. And anybody whose books do not show the liabilities is living in a dream world and heading for a fall.