Reply #28: Peter Schiff: "Growth" is in the Eye of the Beholder [View All]

[mojavekid]

http://www.safehaven.com/article-7487.htm

It may come as a shock to many of you, but I too believe that we are experiencing a "Goldilocks" economy. However, unlike most on Wall Street I do not define this as economic growth that is neither too hot nor too cold. I believe the analogy is apt simply because U.S. economic growth is a fairy tale! When such gains are measured against the gains in the price of just about anything people buy, or in just about any foreign currency, it's a whole different story. For example; measured in euros, U.S. GDP has declined from 11.5 trillion in January of 2000 to 10 trillion today. From a European perspective, the U.S. economy has been in a seven-year recession, with GDP declining by close to 2% per annum.

Also ignored in the rhapsodizing over U.S. GDP growth is the extent to which consumption has been paid for with borrowed money. Since these debts must be repaid with interest, GDP will likely decline even more significantly in the future. Had we borrowed primarily to finance capital investment this would not be the case, as the loans could have been repaid out of increased income. However, as the vast majority of borrowing is simply used to purchase consumer goods, the income needed to repay the debts will have to come at the expense of reduced future consumption.

This week we received new data that illustrates how big of a financial hole U.S. consumers are digging. Despite disappointing sales from major retailers such as Target and Circuit City, first-quarter profits at MasterCard surged 70% to a record $214.9 million following a 19% jump in transactions. I see two possible explanations for this apparent paradox. The first is that despite buying fewer items, consumers were forced to borrow to pay for things that until recently they could afford to pay for in cash. A second possibility is that due to disappearing home equity and tighter lending standards, fewer home owners were able to tap into home equity and were thus forced to use credit cards instead. Since credit card debt carries higher interest rates and is non-tax deductible, it is far more expensive to finance then mortgage debt. Under either possibility, future consumption will suffer as an even greater share of personal income is devoted to making interest and principal payments on items consumed in the past.

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