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Consumers confidant enough to go even deeper into debt.

Consumers confidant enough to go even deeper into debt.

Yesterday the University of Michigan reported its first monthly increase in
consumer confidence in six months as its index increased to 84.2 from 80.6
in October. Today the Commerce Department released data showing that September
personal incomes grew by only 0.1 percent while September personal spending
grew by 0.4 percent. American consumers are “confident” (perhaps
a better word would be “irresponsible”) enough to go even deeper
into debt to buy imported products, while foreign savers are foolish enough
to lend them the money necessary to do it. This situation, while heralded as
good news by shortsighted, miss-informed Wall Street economists, is actually
bad new for the long-term health of the U.S. economy. Buy going deeper into
debt now to consume beyond his means, the American consumer is actually undermining
his future consumption by an even greater amount. This is due to the fact the
interest paid to finance current consumption, as well as the principle payments
needed to retire the principle, inevitably reduces future consumption by a
greater amount than the current consumption which such borrowing finances.
The only true way for Americans to increase total consumption is to save more.
Higher personal savings results in interest income, which enables greater future
consumption. However, such a responsible and beneficial change in consumer
behavior is being resisted by the Fed, which is doing everything in its power
to encourage Americans to go even deeper into debt. This is because the inevitable
decline in consumption which would result from more responsible behavior by
Americans would push the U.S. economy into recession. The Fed, in an effort
postpone that recession, is only ensuring that the inevitable recession will
be that much more severe, as the additional debt currently being accumulated
only serves to reduce future consumption even further. This is similar to a
heroine addict postponing withdrawal by shoot up even more heroine. The additional
fix does indeed postpone the symptoms, but ultimately makes them even more
severe.

What so many modern economist fail to understand is that the only true way
that a society can increase consumption is to first increase production. Increased
production must be proceeded by capital accumulation, which must be financed
though savings. It is under consumption that frees up the necessary scarce
resources that makes possible capital formation. Perhaps Alan Greenspan should
heed the words of 19th Century French economist Jean-Bapsiste Say, who 200
years ago wrote, “Encouragement of consumption is no benefit to commerce,
for the difficulty lies in supplying the means, not in stimulating the desire
of consumption; and we have seen that production alone furnishes those means.
Thus, it is the aim of good government to stimulate production, of bad government
to encourage consumption.”

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