At the End of the Credit Line

Posted: Aug 11, 2011 12:01 AM

From Barack Obama to Michele Bachmann; everyone is looking for the key to job creation. 

In order to find the answer, you must first understand the problem.  So far, I’ve heard nobody (and I mean nobody), and that’s both left and right, state the overwhelming reason for monumental job loss. 

Most blame outsourcing (Donald Trump) and I don’t disagree, it does contribute.  Others will look at the demise of Blockbuster and Borders and remark that job loss is created by increased technology. 

I also agree with that assessment to a certain degree.  However, the most significant cause of joblessness and why it will be years before it will be better (as corroborated by the Fed’s most recent statement) is debt.  How can debt create job loss? 

Well, grasshopper, pay attention and learn from an Austrian (please never confuse me with a Keynesian.)

For many years, the head of household was the sole provider for food, clothing, and shelter.  Then, the dynamic suddenly changed.  People decided they wanted material possessions instantly, not sometime in the future.  That required a dual income, with both husband and wife bringing home the bacon. 

Standards of living rose, one car became two cars or sometimes three cars.  Small convenient houses became larger and larger, and periodic low-key vacations became worldwide excursions.  Imagine a married couple earning a combined $80,000 per year (well under Obama’s $250,000 “rich” level.) 

In the late 1990’s and through the turn of the century to 2008, people found that $80,000 was not enough.  Through credit cards, home equity loans, refinancing, and job switching, a couple could live as if they were making $120,000 per year.  Sorry to say, it just wasn’t one couple, it was the entire country. 

To keep up with the extra spending demand, the service sector was dramatically expanded.  Instead of six restaurants, a community needed ten.  Rather than just two movies theaters, there were now four, and a town that had four electronic stores now had six. 

You get the idea. 

Every additional enterprise required more employees who were only trained to serve, not manufacture. (Manufacturing became a thing of the past in our country a long time ago.)  The inevitable end result should have come as no surprise. 

When the married couple maxed their credit cards, witnessed their houses go upside down (mortgage), and faced the threat of imminent unemployment, spending came to a complete standstill.  Thus, citing our example, if the couple had to live on $80,000, at least $40,000 had disappeared from the economy.      

The cycle of boom-bust (growth and contraction) has to occur naturally without outside interference, and in 2008 that certainly wasn’t the case.  Therefore, we will experience high unemployment for many years to come because there is no extra money to spend; there is no need for extra businesses, and consequently no need for extra employees. 

In fact, in their statement released on Tuesday, the Federal Reserve basically echoed my thoughts verbatim.   

We are in a very regrettable situation, but that’s just the way it is.    

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