Will Turbo-charging our Economy Lead to $700 Donkey’s Head Stew?

I read an interesting book recently: The New Depression: the Breakdown of the Paper Money Economy by Richard Duncan. To vastly simplify Richard’s argument, it is the supply of credit more than the supply of money that influences our economy now. Or in laymen terms: the influence of a physical press printing greenbacks influences our economy orders of magnitude less than the creation of credit. In 1945 the Total Credit Market Debt held by creditors was $355 Billion. As of second quarter 2013 it is $57.562 Trillion. (http://www.federalreserve.gov/releases/z1/current/accessible/l1.htm) A 40 year credit boom has turbo-boosted our economy since the 1980’s. But at what cost? Our debt (government, business & household) now stands at 4X our GDP.

            There seems to be consensus that we are on an unsustainable path. Unfortunately that seems to be where the consensus ends. Some argue for austerity - massive cuts in spending to reduce the deficit. The difficulty with the austerity solution is that our government spends 1/3 of every dollar spent. So any significant cut in federal spending will have a negative impact on the economy. Thus many support the status quo: keep turbo-charging our economy by creating credit. This is essentially Richard’s argument. He does not deny the presence of serious warning signs, but he says we can avoid another Great Depression if we act now.

What should we do? Richard contends that we should continue turbo-charging our economy by creating credit but instead of using that credit to fuel short-term consumption we should invest in long-term profit-making ventures like solar energy. Richard concludes, “What a tragic mistake it would be to impose austerity and see our world implode, when so much credit is available at ultra-low costs. All that is required is for us, as a society, to invest that credit imaginatively. If we do, we can achieve global economic prosperity beyond the dreams of all earlier generations.”

            I’m not an economist but this conclusion seems to me to be a pipe dream. If I was struggling to pay my current mortgage, what sense does it make to buy a second house with an even larger mortgage – simply because the interest rate is ultra-low? You may hope to turn a profit on the second mortgage and thus be able to pay off the first mortgage more quickly. But then again you may not. It is all a very big gamble!

            What should our response as Christians be to the financial mess our country finds itself in? I think we must begin by practicing good stewardship at home with our own personal finances (1 Corinthians 4:2, Matthew 25:14-30). America’s over-indebtedness is not just a federal government problem, over-indebtedness is also a household problem and a corporation problem.

The second thing Christians should do is believe in absolute truth and ground that belief in Scripture and history. Many will say, “We live in a different world now. The economic process is no longer driven by saving and investment. Today it is driven by borrowing and consumption. Yes, total credit expanded 50 times in less than 50 years to keep the American dream alive and to create wealth but credit can continue to push our economy forward if we don’t stop creating it.” Richard argues along these lines. “The U.S. government can now borrow money for 10 years at a cost of 2% interest a year. If it borrows at that rate and invests in projects that yield even 3%, ‘Creditopia’ will survive. If it borrows at that rate and invests on a grand scale in grand projects, precarious Creditopia could be transformed into a sustainable Utopia in which the cost of energy falls 90% and life expectancy doubles.”

The trouble with such logic is that it flies in the face of history and embraces the mirage that you can have your cake and eat it too. The truth is there “ain’t no such thing as a free lunch.” Personally, I think interrupting the normal boom and bust cycle of economies by turbo-charging them with credit over the last 40 years is simply postponing and probably amplifying the bust. Newton’s third law comes to mind: “for every action there is an equal and opposite reaction.”

Talk of a “utopia” sounds eerily similar to what Hitler promised Germany during its tumultuous economic times. As Christians we must be salt and light, anchoring our culture to the truth. Our actions have consequences. As anyone who has had a hangnail or a tooth ache knows, postponing prudent action to avoid pain now will only increase the pain later. Dear Christian, read the history of the Kingdom of Israel as recorded in the Bible (1 Samuel – 2 Kings). Notice the action – reaction/consequences connection throughout those centuries. Galatians 6:7 “Do not be deceived: God cannot be mocked. A man reaps what he sows.” At the height of an economic boom Solomon made gold shields (1 Kings 10:16-17). But the boom was built in large part on the “credit” of forced labor. This boom lasted 40 years (not unlike our current credit boom?) but collapsed when Solomon’s son refused to recognize the need to pull back the throttle and stop turbo-charging the economy. The forced laborers revolted, the kingdom was split in two and 5 years later the very gold shields that Solomon made during times of excess were taken (1 Kings 14:25ff).

Though most of the signs point to difficult times in our future, we are Christians and our hope is in Christ and as such our future is radiant and secure! For the Lord is a Redeemer and His eyes are on His people. At one point in Israel’s history He even rescued them from hyper-inflation that was so bad that a donkey’s head was going for $700 in the marketplace (2 Kings 6:24-7:20). Therefore let us not despair, though the earth give way or we be crushed by deflation or inflation for the city of God shall not be moved because God is in her midst! (Psalm 46)