Why is a Fed policy of almost 0% interest rate, and a $13 trillion bailout package not going to work?
Answer:
Because we broke the game.
When the market crashed, and real estate continued to fall, the American consumer was faced with massive layoffs, and a dwindling net worth both in IRA’s 401K’s and value of their real estate and other tangible property.
Americans have begun to look at their new SUV every year, the $6000 vacations, and the garage and basements loaded with unwanted stuff , and have come to the realization that they have too many possessions , and less and less money to pay for them.
Consumers have stopped buying on credit, they are reducing debt at a record pace, and are saying no on new purchases.
The basic formula which has driven our economy for the better part of the last 60 years is grinding to a halt, and has begun to unravel at an increasingly rapid pace.
After WW II and well into the 50’s and 60’s, we were a nation conditioned to save.We increased our bank accounts on a regular basis, and the idea of credit cards and borrowing to purchase was approached with temerity.
We would spend our savings to raise our families, and educate our children, We were a lender nation.
In the 70’s Nixon took us off the gold standard. Instead of being backed by gold reserves, our currency was backed by the promise and faith of the government.
The recession in the 70’s , spurred on by OPEC, turned into the stagflation of the late 70’s. The government attempted to fight the recession with large spending, and massive(at that time) increases in the money supply.
The influx of newly printed cash into a stagnant economy resulted in massive inflation and interest rates in the upper teens and low 20’s
Reganomics and the increased intervention by the Fed under Volker and Greenspan turned us into a nation of borrowers and shoppers. .We became a debtor nation.
By the 90’s, we were spending more than we made, riding every economic bubble and market excess to new heights of deficit spending.
By the 00’s, we had stopped saving entirely, making shopping the national pastime .
Every recession has been cured with easy credit and the ever expanding money supply/
This never ending credit increase led to the creation of more and more insidious lending instruments, leveraging our homes as engines for credit, and making it easier and easier to purchase our homes without ability to pay for them.
Part III to come.