Corrupted Thinking In A Money Culture

Dr. Kurt Richebächer

Dr. Kurt Richebächer's articles appear regularly in The Wall Street Journal, Barron's, the U.S. edition of The Fleet Street Letter This piece was orginally published in the The Daily Reckoning, a free daily e-mail offering commentary on the days stock news.
It used to be a truism among economists of all schools of thought that the growth of an economy’s tangible capital stock was the key determinant of increased productivity and subsequently of good, high-paying jobs. And it also used to be a truism for economists that from a macroeconomic perspective, tangible capital investment into factories, production equipment, and commercial and residential building represents the one and only genuine wealth creation.

But in America’s new money culture, policymakers and economists make no difference between wealth created through saving and investment in the real economy and wealth created in the markets through asset bubbles, engendered by extremely loose money and credit.

In 1996, an article in Foreign Policy entitled “Securities: The New Wealth Machine,” explained how securitization - the issuance of high-quality bonds and stocks - has become the most powerful engine of wealth creation in today’s world economy. Whereas societies used to accumulate wealth only slowly, they can now do so quickly and directly, and “the new approach requires that a state find ways to increase the market value of its productive assets.” In such a strategy, “an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.”

This a perfect description of the corrupted economic thinking that is today ruling in America not only in corporations and the financial markets, but even among policymakers, elevating wealth-creation, that is, bubble-creation, to the ultimate of wisdom in the policy of economic growth.

There can be no question that the rapid sequence of asset bubbles - stocks, bonds, housing - that the United States has seen in the past few years were crucial in stimulating economic growth. Considering, though, its tremendously lopsided effect on consumer spending and the associated consumer-borrowing orgy, we are unable to regard this as a reasonable and sustainable policy. It works in the short run from the demand side, but it has come at heavy structural costs.

With these remarks, we wanted to make one thing perfectly clear. It is not profits, savings and investment that drive U.S. economic growth. It is America’s unparalleled credit machine, and that alone, which makes all the difference in economic growth and wealth creation between America and the rest of the world. ...Continued