Bust stories overtaking boom stories

By Mark Luedtke

Boom-bust cycles are caused by an artificial increase in credit. When interest rates are held artificially low, like the Federal Reserve (Fed) has done not only since 2008, but since the 1970s, it confuses entrepreneurs into believing more real resources have been saved and can be borrowed to build new businesses and expand existing ones. Borrowing and debt explode. This produces a temporary boom in which you see headline after headline touting businesses starting, expanding, and hiring.

That’s what the Dayton Daily News has been reporting for the last couple of years. Every week it announced new businesses, mostly pizza places, brewpubs, and donut shops.

There are several problems with this. The real resources for new businesses have to come from somewhere, and since the economy is not really growing, only artificial credit is growing, they come from capital consumption. Capital consumption during previous booms produced the disintegrating eyesores littering the area. Less capital means workers make less money. Squandered resources make everybody poorer.

We’re suffering massive capital consumption now, and squandered capital will become new eyesores in the near future.

Capital consumption is one reason for increasing economic division between the haves-a-lot and the haves-little-or-nothing. It’s the cause of the rampant local economic division in the region.

Furthermore, because there’s little or no real increase in demand, the new businesses take customers from existing businesses. Some must close. Recently I’ve noticed more stories of bankrupted businesses than new ones. This may signal the end of the boom.

Expect to see more and more articles like this one from the DDN: “German grocery store chain Lidl has halted plans to open a store in Beavercreek,” it wrote.

The DDN also quoted the owner of pioneering Blank Slate Brewing in Cincinnati which closed suddenly. “The reason for our closure is pretty simple. We ran out of money. We simply don’t have enough cash to keep going,” he posted.

Busted business stories are canaries in the coal mine. By the time the National Bureau of Economics Research (NBER) officially declared a recession during the last bust, it reported the recession had begun six months earlier. The same thing will likely happen with the coming bust. The recession seems to have already started.

Another sign the crash is near is banks shuttered 1,700 branches in the year ending June 2017. That’s the most ever.

Artificial credit also causes price inflation. That’s why housing prices have soared to record highs much as they did right before the last crash.

Wall Street seems to have realized boom is turning to bust too. The Dow recently dropped over 10 percent. It fell a record 1,175 in one day. Talking heads say not to worry. Since 2008 the Dow has dropped numerous times only to quickly rebound. That’s supposed to happen again.

But this time is different. During the previous crashes, the Fed was flooding markets with billions of dollars of funny-money every month from its quantitative easing program. It was holding interest rates at zero. Now the Fed is raising rates and withdrawing credit from markets.

The bust will follow. That’s inevitable. It’s just a question of how soon. Stocks may rebound first. They may not. Nobody can predict for sure.

The Fed is stuck between a declining economy and inflation. While the Fed claims inflation is below 2 percent, grocery and energy bills and asset price inflation expose that lie. Fed governors are raising rates because they know real inflation is getting out of control. Janet Yellen resigned as Fed chief after an unusually short run to escape blame for the crash.

Bloomberg explains, “Pressure again came from the Treasury market, where another weak auction gave bond bears ammunition, sending the 10-year yield to the highest in four years. Equity investors took bond signals to mean interest rates will push higher, denting earnings and consumer-spending power.”

Treasury rates have remained remarkably low for years because the Fed bought huge amounts of them. Now yields are rising despite that. The Fed has lost control of interest rates because of real inflation.

While this is happening, thanks to big-spending Republicans, the US government is on track to borrow over $1 trillion this year, twice what it borrowed last year. President Trump is pushing a $1.5 trillion infrastructure boondoggle, twice the outrageous boondoggle of President Obama which improved nothing.

It’s hard to imagine our rulers doing more damage, but every new regime, regardless of party, does. We’re going to pay an unprecedented price, and soon.

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Reach DCP freelance writer Mark Luedtke at MarkLuedtke@DaytonCityPaper.com.

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