It is rather obvious that inflation is part of our current economy yet underreported. Multiple articles have discussed this including one we did looking at the overall budget expenses for most American households. I’m not sure why the mainstream media isn’t stating the obvious; that American families need credit to keep the economy running. We aren’t talking about modest ratios of debt to income, but a growing amount of credit is being used as a bridge between the wage stagnation we have been facing and covering monthly expenses. I was skimming over article after article and no one seems to talk about the wage and price gap. Yes, we hear about families having a hard time making their mortgage payments. But do you really need a 10 page analysis on why a person making $14,000 a year can’t afford a $720,000 loan? The true story is in the massive wage stagnation of the nation. At a time when the unemployment rate is at record lows, GDP is growing, and home prices skyrocketing why is it that Americans are having to tap into unprecedented amounts of credit? We saw how dependent the overall global economy is addicted to credit when in August the markets literally went into a screeching halt over liquidity. No credit, no money. In fact, we are witnessing an interesting shift to a credit equals money economy. Think Americans are saving?



Americans actually spend more than they earn. How can this be? For one, we rarely see cash anymore. At least on a large scale. Most people get their paycheck electronically deposited. Then they pay their mortgage with e-Bills. Then they use debit and credit cards for every purchase including items from fast food chains. As if you need to charge a 50 cent donut on your American Express. When was the last time that you cashed your check and had the entire amount in your hands? It is interesting to note that this faith in electronic money hit a few walls when people couldn’t withdraw money from the UK ’s Northern Rock online and folks did a mini-bank run. We also had a taste of it here with NetBank having online difficulties. Banks are big and look stately because they are to inspire security. When you see a vault, you know something of value is kept behind there. But what if the vault opened and all you saw was a laptop showing a brief chart of credits and debits on some accounting software? I understand that electronic banking systems are here to stay and they do make life more convenient. You also need credit for daily necessities like buying a home, insurance rates, and sometimes employement. But studies also show that people spend up to 18 percent more if they use their credit cards instead of cold green cash. This leads us into the current predicament, if money is now interchangeable with credit, what happens when the credit markets stop?

You Want Money? Uncle Fed has a Loan for Ya!

Openly the Fed is beating its chest like a Neanderthal stating that it will do everything to stifle inflation. However, when we look at BLS data, inflation isn’t to be found. O where o where are you inflation in government stats? The government wants you to believe that prices are stable but debt to income ratios have never been higher for the country. Why is this? With such a massive boom in housing, you would think people would have equity and diversified wealth management strategies. This isn’t the case with most American’s since most of their wealth is stored in housing. Don’t think so? Take a look at the booming mortgage debt in the US:

Not only is the booming debt a symptom of something larger, but the mentality of the continuous upgrade and moving up places owners in this perpeptual hamster wheel of renewing debt. Case and point. A friend was nearing the end of his car payments. The car is still in excellent condition and he seemed excited. I asked him what he planned to do with the freed up monthly cash flow. “Not sure what I’ll do with the extra money. I think I’m going to trade it in and buy a convertible.” To each their own. But you see how this cycle perpetuates. With housing, if you trade one over inflated asset for another, you are only feeding into the game. And you become dependent on credit as a facilitator. So there are multiple things happening here including the bamboozling of the American pubic that they need larger and larger homes. Oh really? How odd in the face of our declining family size; and keep in mind this is occurring in light of baby boomers downsizing and many people deciding to live solo. Working professionals are holding off on having children since they realize that they probably can’t afford to have children and provide an adequate lifestyle in many expensive metro areas. Many young families are wrestling with the issue of having children. Even with two good incomes, many families run the numbers and realize that it will be a stretch if one partner decides to stay at home for a few years. And then you have future college costs. As you can see, the argument for larger homes is more psychological than economical. The need for larger homes and cars is driven by behavioral marketing and not economic utility. You notice those Hummer commercials? They have the vehicle with gas mileage ratings looking like GPA scores going over mountains and chasing hyenas in the Sahara . When was the last time you had rapid wildlife chasing you in Santa Monica ?

This credit psychology is played out well in the casino environment. Why do you think they give you chips in exchange for cash? Why do they give you a credit card instead of cash? It is easier to spend when you don’t think of money as money. If someone is able to see what $500,000 looks like, do you think this would change the impact on buying a home in Southern California ? Of course, the Fed is pumping up the money supply while saying they are concerned about inflation. This is absurd since inflation is an issue of too much money floating in the economy. And since credit = money flooding the market with easy credit is going to cause what? So if they are worried about inflation and the root cause of inflation is pumping more money they sure aren’t acting concerned by their policies. I’m not sure the vast majority of American’s really care about inflation so maybe they figure it will just blow over. Folks accept prices going up as a fact of life and as long as they can make the monthly minimum payments to service their revolving debt, they are okay.

Why go to a pay day lender when you have the Fed? Financial institutions don’t need to go to loan sharks when they have the biggest one sitting at the right hand of our government. When things got tough, they speed dialed the Fed and all is okay. But like any payday lender, the interest is what will bring you down. For a short-term fix you harm the stability over the long run. The world markets are reacting and that is why the dollar is at all time lows. Commodities are hitting records and the stock market is also up for the year. Everything is up! Including the debt load on our country. Debt load is increasing:

We’ve read the bills that currently passed. They offer short-term relief to the symptoms of the current housing market but don’t address the root cause. The root cause is we are running the risk of devaluing our currency and possibly creating a hyper-inflationary environment that isn’t reflected in our government numbers except in real world numbers. We are living in a parallel universe apparently. Yet I think the Fed is afraid of deflation and their actions point toward this. When prices start correcting downward, the tools they have will be largely impotent. Some sellers wouldn’t be able to sell even if prices went down 5 or 10 percent. If they have no access to credit or funds, then they are stuck. That is the reason many went with these exotic loans in the first place. They didn’t have the funds to begin with! And buyers are being more cautious by force and their own merit. The force part comes from the fact that there is very little exotic mortgages fueling the current market. The velocity of selling slows down when you have to check documents and verify that prospective buyers’ stated income reflects reality. Things move much quicker when you can mold numbers via stuntman loans. For all other things, you have the Fed.