Hear here first

For many months now here on ze blog I have been saying that this recession would hopefully be different from most. Specifically I have been hoping that the U.S. consumer would reduce its debts. The idea is that for the long-term economic health of the nation that the U.S. could not continue to spend more than it earned.

Most economists, investors and business journalists have been saying that this would be a bad thing. My counter-argument has essentially one of “what is the proper time scale for evaluating this issue?” In other words, if we are exclusively short-term focused then we would desire for the U.S. consumer to continue its excessive spending ways. On the other hand, if we see that putting off a reckoning into the future only makes the problem larger and more difficult then we want to see households de-leveraging. As you all know I strongly favor the former outcome.

Well take notice, the Monday Wall Street Journal has a piece entitled, “Household debt can hasten recovery.” The article basically argues what we have been discussing here for almost a year. Hear here first.

While this post may sound self-congratulatory it is not just that. The article makes an interesting point worth passing along. Namely, while U.S. consumers are de-leveraging, many are doing so by simply defaulting on their debts. That means that the debt is passed onto banks. That causes financial hardship on the banks. And the government is bailing out some of those banks by, you guessed it, lending them money that was raised by issuing debt. In part then the de-leveraging is simply pushing a string. At the end of the thread is the U.S. taxpayer. Ugh!

That means, as always, that the financially responsible are subsidizing the irresponsible. This is anti-capitalism at its finest. And this is why I was opposed to the bailout plan enacted a year ago. Be that as it may, I will trade the leveraging of the Federal government for the de-leveraging of the U.S. consumer any day; so long as the Feds start balancing budgets and paying down the National Debt. Do the Feds have that in them? We will have to wait and see.

I hope that each of you had a superb weekend!

Jason