Inflationistas and Credit Cards

I remember a few years ago, I needed extensive work done on my car. I was offered a credit card to take care of that, with 0% interest if I paid the bill in a year. I paid the bill in 9 months. The repair bill was 10% of my annual income, and my total debt was 25% of my annual income. No problem! Unlike most Americans, I wasn’t even close to being “over leveraged”.

In reading how the 2008 financial crisis cost the economy $14 Trillion (and counting). With a $16 Trillion GDP, that’s 87.5% of the Nation’s Annual Income. Most of that $14 Trillion went to the banks, which fueled a liquidity trap. Considering that most Americans at the time of the financial crash were over leveraged in personal debt by 145% (see first FRED chart), I’m not sure what all the debt hub-bub is about; neither can most of the Keynesian Economists, especially in light of the Social Safety Nets needed to make sure people didn’t starve to death.

072513krugman3-blog480

Part of the “discussion” (and there are many) is inflation. If the Fed keeps printing cash, then inflation is supposed to skyrocket, and you will need a wheelbarrow full of cash in order to buy clothes. That day has never came, and most economists (with notably rare exceptions) think that it never will. But few have looked at WHY that day has never come. Hence the next FRED chart:

fredgraph1

The money that the Fed is printing is never leaving the bank; it’s not getting out into the economy in the form of consumer credit. Granted, I have always argued that credit isn’t wealth, but credit can be used to ease life a little, as with my car repairs; as long as people aren’t over leveraged.

Wages are “sticky”, and credit is largely unavailable to average people (much less low income). Aggregate demand is low, forcing prices to stay low. But more than this, the reason bank assets are soaring is because the Fed is giving them money – a lot of it. Granted there’s an argument for that, however, what the banks are NOT doing with that money, is getting out to consumers.

In other words, no matter how much money the Fed prints to infuse into the economy, the money is never actually making it to the Economy. The Inflationistas would have a better chance of making their argument if the money was actually leaving the bank. However, because wages and the CPI are so sticky, it’s doubtful that inflation would rise even if the money did leave the bank.

It’s not about getting a new credit card, it’s about how much of that credit card you’re going to use. The banks are using a very small portion of it.

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