We sometimes wonder, in wry amusement, what the result would be if the same formula chosen to measure modern quarterly US GDP "growth" was applied to the German Weimar Republic in, say, the third quarter of 1923. We don't know what the exact figure would be. We do know that it would be VERY MUCH larger than the 7.2% recorded for the US economy in the third quarter of 2003.
We all know that such comparisons are frivolous, of course. After all, who needs a wheelbarrow when you've got a wallet full of credit cards and your bank manager has a very large and powerful computer. With these modern tools, it doesn't matter how insane the fiscal and monetary "policy" gets, the results can all be hidden safely away from the jaundiced public eye.
Nowadays, as long as you can service your debt, you're solvent. As long as the interest payments are made, the "asset" remains viable and is rising in "value". As long as the "value" is rising, you can borrow more. Nobody would be fool enough to try to actually pay their debts and nobody would be crass enough to pay cash for anything. Not nowadays. Back in 1923, they had no choice, and the result was they started carrying their cash in wheelbarrows and throwing it at their creditors and at the purveyors of real goods and services as fast as they could. They call that a "hyperinflation" and BOY, they were "hyper" all right. Couldn't happen now. "Wealth" or claims to wealth aren't tangible any more.
So, the US economy "grew" by 7.2% in the third quarter of 2003, its biggest quarterly growth "spurt" in nineteen years. In the second quarter, government spending was the driving force behind "growth" so it rose by a (revised) 3.6%. In the third quarter, consumer spending was the driving force. And, since consumer spending makes up about twice as much of the US economy (on a GDP basis) as does government spending, well naturally enough GDP grew twice as fast. It was up by 7.2%. Eureka!.
What happened? Very simple. The minor contributor was the fact that consumers got tax rebates to spend. The MAJOR contributor was that US mortgage rates, which had been falling since time immemorial, suddenly stopped falling and started to RISE in the third quarter. Instant response - GET THAT REFINANCING NOW. Almost as instant a response - SPEND IT! What on? Well, auto sales (good old 0% financing) were up 26% in the third quarter. And white goods sales boomed too.
Now governments can keep "deficit spending" until either the taxed populace stages a modern version of a Boston Tea Party and/or until no one in the known universe will buy one more piece of Treasury debt paper. Consumers, on the other hand, have no central bank in the garage nor do they have a Treasury in the spare bedroom. They work under a handicap. They can't run off "money" on their color printer and force the rest of the world to accept it at "face value", nor can they run off fancy looking IOUs, ship them to China or Japan, and get paid in REAL "money". Only governments can do that, until either the nation they govern and/or the rest of the world says enough is enough.
The consumer does not have the ability to offer his or her neighbours the choice between accepting his or her IOU as payment for REAL wealth or going to jail. The consumer has to put up something of value in return for what he or she wants. The LAST "thing of value" that most US consumers still possess is their house. Sure, they owe money on it, but the "value" of the house has gone up a LOT since they originally borrowed for it. So they have "equity". All they have to do is to go to the bank and increase their indebtedness to match the new and improved "value" of their house.
US consumers, and those in all the other English-speaking nations in the world, have been doing this for some time. They have been able to do it because the appraised "value" of their houses has continued to rise. The "value" has continued to rise because mortgage rates were going down and the banks had figured out lots of ways to let people "buy" houses with no down payment at all. They could borrow the lot. That made houses "affordable" to more and more people. So they bid the prices up.
That was when mortgage rates were going down. They're not going down any more. Seeing this, the US consumer stormed the lending agencies to borrow up to the hilt against the "value" of their house. Only one problem. As mortgage rates continue to rise, and as even official US rates of interest start to rise - as they inevitably will - US consumers are going to run out of ways to continue to consume. Worse, they are going to find their debt services costs eating up their "disposable" income from behind, to the point where they can hardly consume at all.
It is a likely bet that the refinancing orgy of the third quarter of 2003 was the TOP. Looking ahead, with nothing left to hock to get the wherewithal to consume, the US consumer is poised on the precipice.
Germans in the Weimar republic knew they faced "hyperinflation" because they were running around with wheelbarrows full of "money". Now, nobody carries "money", so the Fed can actually get away telling Americans they are looking out for their welfare by being vigilant to make sure that inflation doesn't fall too LOW?! Pathetic, isn't it?
Most Americans, (and Canadians and Brits and Aussies et al) have watched the price of vital goods and services go up for many months. They have seen the level of various government imposts, none of which can be avoided, skyrocket. Americans have not seen the prices of consumer goods rise much, because America's major Asian trading partners (with the partial exception of Japan) have not let their currencies appreciate against the falling US Dollar. Mr Bush, who doesn't see the connection, wants this "currency manipulation" to stop. Treasury Secretary Snow, who DOES see the connection, doesn't.
Here is the situation in which $US Gold continues, unsuccessfully so far, to beat its head against the $US 390 level, as a prelude to the $US 400 level. After ten months of 2003, Gold's rise this year in $US terms is approximately HALF the fall of the $US this year as measured by the $US index. Is that a case of "inflation being too low", Mr Greenspan?
Mr Bush is, of course, claiming full credit for this third quarter surge in US economic "growth". He is like a man who buys another bottle by taking the last item he has of value off to the pawnshop. It's "fun" - until the bottle is empty. Then the question arises: Where is the next bottle going to come from?
A tumour is a malignant growth on the body of a human being which must be surgically removed if that man or woman is to regain health, or in some cases, survive. The printing and borrowing machines of the US federal government have blown up a grotesque tumour on the global financial system. A similar operation is required. It can be done, and the "patient" can indeed regain health. But if it is not done SOON, then the survival of the system comes into grave question.