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Paying off credit card bills with new credit cards won’t work forever

March 13, 2013

I want to answer a question from my last blog post by writing another blog post. My main point was that liquidity is not merely a product of our central banks. The Federal Reserve does the dirty work of our federal government by printing money and zeroing out interest rates. A very shortsighted view says, “stimulate our economy at any cost.” We have allowed our elected leaders to continue accommodative monetary, economic and tax policies because it gives us instant gratification.

The day of reckoning has arrived — or should I say, did arrive, probably when the dot-com bubble burst in 2000. At that point, then-Fed Chairman Alan Greenspan doubled down on monetary easing, producing the infamous real estate/credit bubble. When that move blew up in 2008, our new Fed Chairman Ben Bernanke quadrupled our bet on the monetary easing front. Between the Federal Government and the Federal Reserve we conservatively added $10 trillion in liquidity since 2008. That is nearly 20 percent of the nation’s entire wealth that has been built up since our inception!

Here is the difference between this current liquidity wealth effect and our nation’s past wealth accumulation. Our past wealth was built on trade surpluses and hard-earned savings from agricultural, manufacturing and production over a period of more than 200 years. This new “wealth” is a product of the printing press and debt. It is the product of the financial system itself and not tangible products or resources. It is not dissimilar to me taking out a new credit card with a $100,000 limit and declaring myself $100,000 richer. I may be able to spend an extra $100,000, but I will have an equivalent liability plus interest. In my book that is not a good definition for wealth.

The United States government has somewhere north of $200 trillion in liabilities that are the result of spending more than we have. However, our appetite for adding to the liability side of our ledger sheet has increased at an exponential rate in the last five years. Just like in our personal finances, sooner than later the bill comes due and taking out a new credit card to pay off the balance of our old credit card won’t work after awhile.

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