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Faith in the Market Alone Will Not Produce a Recovery

By: Steve Johnson

7/31/2009 - 92 Comments

Wealth is the difference between production and consumption, which is also known as savings.

It is almost comical to witness Obama and Bernanke attempt to restore the market by simply trying to increase investor faith in the market, telling everyone that an economic recovery is just around the corner, day after day.  Call it economic campaigning.

Economic Campaign

The idea is that if Obama and Bernanke can talk about an economic recovery and convince the public and the investment community that the economy is starting to recover, then people will start believing it and start spending again and a real recovery will follow.

Their economic campaign appears to be working based on the recent stock market rally. But a real economic recovery is nowhere in sight.  The public cannot return to their spending ways even if they wanted to because their credit has been drastically reduced. 

Credit cards are becoming harder and harder to get as the delinquent rates climb and very few can qualify for a home equity loan anymore because of the massive drop in real estate prices.   The only money left to spend is from paychecks, which is dropping with the increasing unemployment rate, which will soon be over 10%.

It is impossible for the US consumer to continue to drive the US or the global economy.  No matter what the politicians and the financial media say, the US consumer is not going to be able to drive the economy like they did in the last decade.

There Is No Recovery

With the loss of credit, the US consumer is not coming back.  The government stimulus programs will not succeed in restoring consumer credit and therefore will not succeed in restoring the economy that is 72% driven by consumer spending.

At best the stimulus is providing a few short term jobs, but they are not productive and therefore not wealth producing.  Instead many of the jobs created by the stimulus are further reducing our productivity.  This government intervention in the job market is holding labor costs higher then they need to be for any recovery to begin. 

Besides holding labor costs high, these jobs are being paid for by other tax payers, further reducing the amount of wealth they are producing. The burden of the stimulus on the economy is preventing new businesses from getting started or expanding or creating new jobs.

There is only one way to produce wealth and that is by savings. Savings are accumulated by producing more then you consume.  Hard work and sweet is the only way to increase your production, while forgoing consumption even when you have the money or credit is the only way to decrease your spending - and the difference is savings. 

The US consumer is desperate for more savings. The savings rate will be increasing for years to come, which means the US consumer will be spending less and that means real GDP will be decreasing for years to come.  You cannot believe in the GDP that the government claims the US is creating without subtracting the trillions of dollars in debt the government is spending.

Savings Are the Key to the Recovery

Instead of trying to re-inflate the phony bubble economy built on credit and debt - rather than savings like it was during the industrial revolution - Obama and company should focus on re-educating the public about the need for everyone to rebuild their personal savings.

Instead they is trying to convince the public to take on more reckless debt by increasing consumption, even in a quickly declining job market.

We are a long way from an economic recovery.

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