Why the Economic Stimulus (Bailout) will not work.

 

When we had the gold standard the Congress was only able to print the exact same amount of currency as there was gold held in the Federal Reserve at Ft. Knox. Once the gold standard was removed from the currency the congress was granted the ability to print whatever amount of currency it wanted.  As demonstrated in Graph A the Congress went spend crazy just after Nixon called for abolishing the gold standard in August 1971. The more paper currency that has flooded the market place the less each paper bill is worth until a single paper dollar bill isn’t worth $.0001. Or 1 tenth of one cent as dramatized in graph B.

 

 

 

Graph A

 

 

 

Graph B

 

 

At the same time due to the influx of new money people who were not eligible to get a loan became eligible to get a credit card, auto loan, and a mortgage.  As demonstrated by the second graph while the individual income increased slightly individual debt grew at an alarming pace.

 

Here is another chart that shows just how bad our debt situation has grown in the last two decades. This next chart shows the ratio of total credit market debt (debt at all levels from household and corporate to government) to GDP. Since 2000 it has grown 25% faster than our economy. This ratio has doubled since 1982.

click to enlarge

Graph C                                                                                              Graph D

 

Graph C – Total credit market debt to GDP percentage, showing that we hit nearly 350% in the first quarter of 2008. This rate of debt increase is clearly unsustainable but more alarming is what will happen when we have a significant economic slowdown.

 

As of the first quarter 2008, U.S. debt was nearly 350% of GDP but that's not the scary part. Look what happened the last time we had a really serious slowdown in the early 1930s. GDP fell by 45% but debt only grew bigger, jumping from 155% in 1929 to 260% by 1932 as the economy worsened – a 67% increase in just three years.

A similar economic meltdown again, which is now looking increasingly likely, would push our total debt to GDP ratio to nearly 600%!

 

According to USA Today and bankrate.com, the average debt of the American household is $84,454 and one out of every 73 of those households had to file for bankruptcy protection in 2003.  The average credit card debt is around nine thousand dollars, triple what it was in 1990.  Not only are we as a whole getting further in debt, but we aren't saving any money either.  Americans are saving just under 2% of their income since 2000, down from an 8% average in the 1980's.  What is behind the reasoning for this seemingly careless attitude towards debt and savings in our country?  It seems through recent surveys and studies that Kentuckians are going into debt for much the same reasons as the rest of the nation, for necessities.  For instance, medical debt is the cause of one in every 20 bankruptcies.  The average medical debt for someone that files bankruptcy for that reason is around $25,000.  The typical person affected is retired, on a fixed income, and relying on high interest rate credit cards to purchase expensive prescriptions. 

 

If you knew that a $1,000 charge on a credit card would take almost 22 years to pay off, and would cost over $2,300 in interest in you only made the minimum payments would you only make the minimum payments?  Most people do.  Sixty percent of active credit card debt is not paid off monthly and the typical family pays out about $1200 annually in credit card interest.

 

Credit is money wasted and not used to create, generate or support anything. Credit actually helps to diminish the cash flow while adding to the amount of currency in the economic environment as most of it goes out in interest. Therefore a Credit Free Life is preferable.

 

 

 

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