Back in the ’50s, the typical family had one car. Now, driveways are full of them. And, of course, there are Jacuzzis, air-conditioning, big-screen TVs and all the other paraphernalia of modern life.
From the Eisenhower years to the Bush years, however, the U.S. economy was maturing. In the ’50s, manufacturing profits were half the nation’s total. Americans made things and sold them to foreigners. This left us with money to spend, to lend, to save...or to invest. Typically, we saved nearly 10% of what we earned in the Eisenhower/Kennedy era.
But then came a New Era. The government spent too much in the ’60s...and rather than own up and make good, the Nixon Administration defaulted. “The dollar is our currency, but your problem,” said Treasury Secretary John Connolly in a moment of spellbinding honesty. Then, in 1972, the U.S. trade deficit stood at $3 billion. Now, the trade deficit is nearly $3 billion every day!
It did not pay to save dollars in the ’70s. Inflation rose to 12% and made them worth less and less. In a way, this was the lesson Americans most wanted to learn. They didn’t want to save anyway...they wanted to spend. Gradually, the economy shifted from one in which people made things at a profit to one in which they bought things at a loss. Households turned their attention to how to consume what they had never earned. And business turned its attention to how make money by selling to people who didn’t have any money. The economy itself shifted to one based on manufacturing to one that emphasized marketing...and then finance. Factories rusted. But shopping malls and housing development proliferated.
In 1967, Henry Kaufman was made a full partner at Solomon Bros. in New York. His compensation: $25,000 a year. Forty years later, the average hedge fund manager is taking home nearly $24,000 PER WEEK.
Meanwhile, the average U.S. weekly pay is only $841 – a figure that is about the same, in real terms, as the average 30 years ago. And here is the question to which we keep returning, a question that is purely rhetorical:
How can people who don’t earn more money still spend more?
Not only do we know the answer, we’ve given it to Dear Readers countless times:
They borrow.
Total U.S. credit debt rose during the Greenspan years alone from $9.8 trillion to $37.3 trillion – a 400% increase. That is the weight now pressing down on the U.S. economy. That is the burden that must be lightened.
And it is being lightened – in two ways. Many debts are going bad. House foreclosures in September doubled from the year before, for example.
The other way it is being lightened is by inflation. Every day, people add more debt...and inflation takes a little more off. In the last 30 years, consumers, business and speculators were able to add debt a lot faster than inflation took it off. But now, debtors are already stretched to their limits...and creditors are getting persnickety. A Reuters report tells us that consumers have switched to credit cards in order to continue spending. Home equity lines and mortgage refinancing has fallen from favor.
Eventually, inflation will wipe out debt. The 1,000% inflation rates in Argentina in the ’80s eliminated most debt. Still today, the country has very little debt. Is it hard to get a mortgage? We don’t know, but if anyone is lending money in Zimbabwe, he should probably seek medical attention and bankruptcy protection; with an inflation rate of 100,000% per year – he will be wiped out overnight.
In America, the process has a long way to go. Official inflation rates are only 2%-3%, though consumers report price hikes much greater than that. Still plenty of excitement ahead!
