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Consumer Credit Could Launch Inflationary Spiral

Economics / Inflation May 05, 2011 - 03:48 AM GMT

By: Dr_Jeff_Lewis

Economics

Recent comments from Walmart chief executive Mike Duke have investors on high alert.  This time, though, the news spreads well beyond Walmart.

At a company event in New York, Duke reminded the crowd that retail is softening, “we’re seeing core consumers under a lot of pressure,” and later added that it was rising fuel costs, just another component of monetary inflation, that was driving the sales loss.  Of particular interest to inflation watchers should be his comments that were mostly ignored. 


End of the month purchases, Duke says, are falling off faster than beginning of the month purchases.  In retail-speak, this corresponds with unemployment benefits, which usually fuel the next month’s early purchasing pattern.  So too do Social Security checks and fixed-income payments, which ordinarily go to seniors and the disabled.

Inflationary Spiral

Americans have learned to deal with rising prices and personal budget shortfalls in all the wrong ways; usually, we borrow as we see fit, never realizing that it is our own spending that allows for further hikes in prices.  To see that end of the month purchases are declining is to see that entitlement payments and other government aid programs are not footing the bills.  So what is the American consumption economy to do?  Return to credit.

A return to consumer credit is mostly a non-starter when we discuss inflation.  In ordinary market cycles, the consumer credit economy is not tied to monetary expansion, and it does not allow for bank reserves and currency stockpiles to flow into the main economy.  This is no longer the case.

In bailing out the banks and purchasing trillions of dollars of assets, the Federal Reserve has made it quite evident to most everyone that the US is loaded with dollars.  This money, which was expected to remain at the M0 level, is now as mobile as ever.  Banks earn only 0-.5% on their stored dollars, and given the rise in confidence for the (employed) American consumer, banks should have little reason to keep their dollars at the Fed, earning far less than the rate of inflation when so many are willing to pay 10-20% annually on consumer credit lines.

This problem is only compounded by the failure of Social Security to keep up with rising inflation.  When seniors can no longer pay for rising gas and food prices at the same time, they’ll necessarily return to borrowing against their homes in Wall Street’s favorite product: the reverse mortgage.

Reverse mortgages, unlike consumer lines of credit, are entirely inflationary, as the bank can draw on the power of the fractional reserve banking system to further multiply their reserves against a perpetual lending program that is your average reverse mortgage.  In a reverse mortgage, home equity is removed from the homeowner at a steady monthly pace, thus building up a larger and larger debt as the homeowner removes valuable equity simply to pay the bills.  Is this kind of lending sustainable?  Absolutely not, and it only further continues the correlation between housing prices and American wealth.

The inflation concerned investor would be wise to see this opportunity as just another way to hedge their bets against the falling dollar.  With more borrowers now becoming borrowers until death, a slow churning of home equity for M2 dollars will create more dollars, more borrowing, more consumption and higher prices. 

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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