The US Economy Relies on Credit - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 6 May 2014
The US Economy Relies on Credit A  A  A

Miami, Florida

No action yesterday...neither in stocks or in gold.

We're back from South America...toughened up. But more puzzled than ever.

Our horse threw us last week. Maybe that addled our brain. It certainly toughened us up a bit more, physically. And then, we learned about the hard life of the poor cattle.

High in the mountains there are pastures. Cattle live there - almost wild. They are the cattle of the local people, but they are so tough they are nearly unsaleable. And they barely survive anyway.

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Gustavo explained:

"Most of the calves die. They are killed by the puma or the condors. The condors are the worst. They attack in groups. So while the mother runs one of them off, the others assault the calf. They don't try to kill it. They just eat it alive. They go after the soft parts. They eat the eyes and the tongue. And they attack from the rear too, pulling out the intestines. Then, of course, the calf dies and they eat the whole thing." is a bit tougher in the Andes...

Including the housing market. Say, for example, you want to buy a house. In the little towns of Argentina - as in much of the undeveloped world - they start a lot of houses...but never seem to finish them. Nearby Molinos has dozens of houses with no roofs...or no doors and windows. In Cafayate, too, houses seem to go up little by little. Walls go up. Then, the roof may be put on years later. You see rebar sticking up...and many unplastered walls.

Why? Lack of credit. People can't borrow to buy or build. Instead, they build whenever they have cash. People build houses with paycheck money.

Credit makes it possible to build more efficiently. You borrow the your house...and then pay off the loan over the next 20 or 30 years. Or, you never pay it off. You may refinance. Or you may sell to someone who also takes out another mortgage. This is where it gets interesting. Effectively, the lender owns the property...and you pay 'rent' on it to the mortgage lender.

The curious part of this is that the banks - who lend for mortgages - don't actually have any money to lend. The system - developed by the Fed and the banking industry - allows banks to provide credit without having any deposits or reserves to speak of. They're not lending money. When they lend, they create the money; it didn't exist before. They're lending credit. And, over the last 30 years, the US economy has come to depend on it.

This credit helps the economy expand. It allows borrowers to command the resources needed to build their houses. Normally, their borrowing is limited to the available savings. But not in the new credit economy. The sky's the limit!

And then, the borrowers either pay the banks back the money the banks never had...or the banks become permanent 'rentiers.' Bankers collect mortgage payments. And since few people pay off their mortgages, the banks get their 'rents' almost forever. Pretty sweet, no?

In other words, this is more or less how the US economy grew over the last 3 or 4 decades - using money from nowhere, which was turned into real assets for the financial sector. The financial industry only made about 10% of the nation's corporate profits in the '60s. By 2007, it was bringing home 40% of profits.

Ben Bernanke was hailed as the "Hero of '08-'09." By preventing a correction, what he was really doing was saving the bankers' hides...and protecting the system that made them rich. And now Janet Yellen has taken up the cause of the poor and unemployed - as if lending more non-existent money will make them better off!

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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