Ask a D.C. insider what’s the best way to solve the debt crisis. Nine times out of ten, they’ll recommend taking on more debt. That’s how things operate in the Potomac swamp. Up is down, right is left, digging yourself into more debt is the best way to get out of it. But it wasn’t always like this. In fact, there used to be common sense when it came to the economy. So where did it all go wrong?
Politicians talk about the uninsured. Special interests argue on behalf of those with pre-existing conditions. But why is no one wondering how doctors are affected by the new law? They’re the ones on the frontlines dealing directly with new patients, as well as the red tape that makes bureaucracies go round.
Politicians proclaim the benefits of small business while on the campaign trail. But when they meet in the seedy halls of Congress, they have no problem doing whatever they can to stifle, regulate, and subdue their progress. Instead of siding with entrepreneurs, these politicians often side with political allies and cronies that helped put them into office.
Just because you’re retired doesn’t mean you have to stop working. Especially now that you have all the time in the world to do what you really want. Entrepreneurs don’t only come out of Silicon Valley. They come from all walks of life, from all different ages. If you’re retired and want to stay active while you relax, then find out the steps you need to take in order to start, manage, and grow your next small business.
Austrian economics does more than tell you what happens when the government disturbs market forces. In the hands of knowledgeable investors and entrepreneurs, it can tell you exactly what to expect from the market. Market behavior depends on how people behave. And how people behave is central to the Austrian perspective.
The U.S. dollar has been the world's reserve currency for almost a century, and already there are signs it may be in decline. But that doesn't mean it's not still valuable. On the contrary... As Chris Mayer explains, there are many reasons the U.S. dollar will remain relevant on the world stage for years to come. Read on...
World War II might have dragged the country out of the Great Depression, but it did so at a great price. Central planning took center stage, and politicans and bureaucrats suddenly knew what was best for America, the economy, and your life. On top of that, they replaced the free market with a new economic system… Creditism.
If you’re good at something should you be penalized so others have a chance at success? Should award winning actors and actresses be barred from future Oscar ceremonies to give other men and women the chance to succeed? Success should always be rewarded and encouraged. But what happens when you have a government that wants to even the playing field and take away the spoils of success. Gregory Bresiger finds out...
Practical people often pooh-pooh fiction reading as a time wasting dalliance, dominated by a Marxist coloring of the world. However, fiction readers were given a scientific reason recently for spending hours absorbing fanciful figments of someone’s imagination.
Argentina is suffering the ravages of government debasement of the currency -- i.e., inflation, the process by which government pays for its ever-increasing debts and bills by simply printing more paper currency. The expanded money supply results in a lower value of everyone’s money, which is reflected in the rising prices of the things that money buys.
When government expansion is allowed to continue unabated or when it casts a heavy regulatory shadow on America’s entrepreneurial spirit, the freedoms that we’ve come to know, and perhaps take for granted, slowly begin to slip away.
Its acceptance is as widespread as its justification is important, for it provides the rationale for the Federal Reserve’s unprecedented monetary expansion since 2008. While critics may dispute the wealth effect’s magnitude, few have challenged its conceptual soundness. Such is the purpose of this article. The wealth effect is but a mantra without merit.
Baron Rothschild, the famous French financier, was once heard to say that he knew of only two men who really understood money -- an obscure clerk in the Bank of France and one of the directors of the Bank of England. “Unfortunately,” he added, “they disagree.”
The new reality of Obamacare’s tax credits has left finance reporters to pen articles warning readers to “take care” when considering a tax credit and providing strategies for how best to “protect yourself.” So what do finance reporters know that the White House doesn’t?
Nihilo ex nihilo fit. Out of nothing, nothing comes. First put forward by ancient Greek philosopher Parmenides in the fifth century B.C., Thomas Aquinas and St. Augustine later used this axiom to prove that the universe needed a “first mover” to get things going. Even if the whole thing began with some kind of “Big Bang” moment, it still needed a banger to bang it. Who? God, of course.
Economic theories don’t lend themselves to laboratory testing, so the work of a national appraisal firm is especially enlightening. A new study lends support to the Austrian business cycle theory, which says that the less government is involved, the faster a market will recover.
What positive steps can we take? The energy that is now expended by well intentioned, freedom-seeking individuals on the destructive course of politics can be turned into powerful steps that will have a positive effect on the future. All are moral, right and just. None require aggressing. Consider the following...
The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
Memories are short, and 2008 is ancient history. Consumers can’t suppress their urge to consume. Lenders can’t suppress their urge to lend. We’ve learned nothing from the last boom-bust. We are repeating it, piling error upon error.
“People will spend more of their equity,” Chris Christopher, an economist at IHS Global Insight in Lexington, Mass., tells Bloomberg. “It won’t be as much as they spent when prices were gaining at a rapid pace in 2005 and 2006, but it should have a positive impact on consumer spending.”
As you may have detected in Mr. Christopher’s statement, bankers (speaking of short memories) are back in the business of making home equity lines of credit — HELOCs — and consumers are ready to ramp up the good life again.
“After six years of declines, lending for so-called HELOCs will rise 30%, to $79.6 billion, in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31%, to $104 billion, it projected.”
This borrowing will spur consumer spending, which, according to Bloomberg, is the largest party of the economy. The Mortgage Bankers Association’s crystal ball predicts home prices will gain 8% this year, and, in turn, Bloomberg reports, “The amount of equity homeowners had in the second quarter rose by $406 billion, to $7.3 trillion, the highest level since 2007.”
Of course, this increase in home prices is a temporary mirage, as empty homes and those occupied by strategic squatters are held off the market by legal kinks in the foreclosure hose. ZeroHedge estimates that an additional 2.5 million homes should be for sale. For now, millions are living in homes mortgage-free “just to perpetuate the illusion that ‘housing has rebounded,’” writes ZeroHedge.
The problem with this consumer debt is that while analysts cheer on the consumer purchases, the debt is what market analyst Robert Prechter calls unproductive. Three years ago, Prechter pointed out in his Elliott Wave Theorist newsletter that banks had been lending to consumers at the expense of businesses.
The nominal numbers are striking. At year-end 1999, according to FDIC figures, commercial and industrial (C&I) loans stood at $971 billion. On June 30 of this year, C&I loan totals stood at $1.4 trillion, an increase of only 44% over more than a dozen years. Again, these numbers are not adjusted for inflation.
Meanwhile, loans secured by real estate totaled $4 trillion on June 30, 2012, a 167% increase from $1.5 trillion on Dec. 31, 1999.
Only business loans are self-liquidating. Healthy businesses generate cash flow that can pay off debt, while consumer loans “have no basis for repayment except the borrower’s prospects for employment and, ultimately, collateral sales,” Prechter wrote.
Lines of credit to businesses are provided with the understanding that the business borrowers will “revolve the debt,” borrow to pay vendors and employees and then pay down the debt as their customers pay them for product. Thus, the debt is directly tied to the business firm’s production. The funds tend to be borrowed only for short periods of time. Credit, in this case, aids a business in potentially earning entrepreneurial profits, which build capital, which ultimately fuels economic expansion.
Conversely, consumer debts are not self-liquidating, but instead stay on the banks’ books for long periods of time, with payments being made only to service the interest and pay down very small portions of the loan principal balance.
Economists think HELOC loans will spur consumer spending and, in turn, GDP. After all, household purchases account for 70% of GDP, according to Bloomberg. However, phony GDP numbers are not a good gauge of the economy’s health. Besides, burying yourself in debt and consumer toys is not the way to individual prosperity.
Austrian economist Hans Sennholz has made a sharp distinction between “productive” and “unproductive” debt:
“A debt incurred for productive purposes, e.g., a commercial or industrial investment designed to earn future incomes, may cover its interest costs and even yield entrepreneurial profits.
“In contrast, new debt in the form of a second mortgage on a home may finance the purchase of a vacation home, new furniture or another automobile, or even a luxury cruise around the world. The debtor may call it ‘productive,’ but it surely does not create capital, i.e., build shops or factories or manufacture tools and dies that enhance the productivity of human labor.”
Capital and wealth are created by saving, not by borrowing and spending.
At the same time, banks are still licking their wounds from the real estate crash. It’s hard to fathom that they would be piling into HELOCs again when they are not ever done writing down these type of loans made in ’06 and ’07. ZeroHedge points out:
“What is shocking is that this is all happening just as the last batch of HELOCs has hit record default rates, and have yet to be cleared off the banks’ nonperforming books. But who cares: Uncle Ben will fix it all.
“That this will all end in another epic housing and credit bubble collapse is by now perfectly clear to everyone. And yet nobody is doing anything to stop it. Surely, once the system collapses for good next time, as at this point the central banks too are all in on rekindling the bubble and there will be nobody left holding the bag, ‘nobody will have been able to foresee any of this happening.’ But for now, the music plays, and one must dance.”
The housing market has not fully corrected, and now banks are looking to kick-start their loan books by lending on collateral that will again plunge in value when the foreclosure tsunami gets under way.
But while bankers must dance and their memories are short, one thing they always remember is that Washington is their friend and its checkbook is big. For HELOC customers, on the other hand, there will be no bailout, just more debt and despair.