by Charles Hugh Smith
Of Two Minds
The bottom line is the Fed can only keep the machine duct-taped together by suppressing the market’s pricing of risk.
One of the Grand Narratives of our era is the substitution of debt for income: as earned income and disposable income have stagnated for 40 years, the gap between the rising cost of living and stagnant household income has been filled by borrowed money.
Money has been borrowed to replace income everywhere: consumers have borrowed money to buy things they otherwise couldn’t afford, students have borrowed over $1 trillion to attend college, governments have borrowed money to fund wars and social spending, corporations have borrowed money to buy back their own shares, pushing stock prices higher.
There’s one little problem with debt: interest must be paid on debt. Let’s focus for a second on the difference between cash income and borrowing money. Cash doesn’t cost money to maintain; debt does. In a functioning economy (as opposed to the dysfunctional mess we have now), cash would earn income from interest paid by borrowers.