Fairytale economics – spending into poverty legend. How the allure and trappings of consumption led the middle class into a modern form of debt servitude.


Ludwig the II of Bavaria is rarely discussed in history class but most would recognize many of his castles especially the one that is replicated in Disneyland (Neuschwanstein Castle).  Ludwig spent money he didn’t have to indulge in his eccentric desire to build opulent castles.  Even wealthy royalty can put their balance sheet into jeopardy if they indulge every whim and wish.  The banking sector for the last decade has allowed many Americans to satisfy nearly every consumer desire they had.  Boats, cars, vacations, clothing, recliners, Jacuzzis, or anything else you can imagine.  Some took this to the extreme and created a massive market that demanded bigger and more extravagant homes even though average Americans were not getting wealthier or earning more money.  How this was accomplished was by allowing massive amounts of debt to accumulate until a crisis imploded the economy.  The credit bubble bursting has forced many into a new life of austerity.  No more Sleeping Beauty castles.

On a GDP percent basis the U.S. isn’t the worst offender but we are up there on the list.  The above list spans out to 2003 (and it only got worse until 2007) and you can already see what big amounts of household debt will do.  Take for example Iceland or Portugal that are now facing major headwinds ahead.  A country cannot go into massive amounts of debt and expect to have a sustainable economy for years moving forward.  It is a short term indulgence that masks deeper rooted problems.  The middle class in America were allowed to think they were all dukes and countesses but when the crisis hit, the banks retreated to protecting only their kings on Wall Street.  This was an economy built on a fairytale.

Part of this naïve belief was pushed by Wall Street and D.C. propaganda.  For decades the idea was that you can spend more than you earn.  This came all the way from the top so it shouldn’t be a surprise that many in the middle class took their signal from their leaders.  What happened?

Source:  Lew Rockwell

The personal savings rate went so low that it went from the double digits in the early 1980s and actually hit a negative percentage not too long ago.  At the same time, the amount of household debt went off the charts.  It is hard to remember that there was a time in our history when debt was actually something to be handled with caution.  In the last decade, the careless risk taking banks did with debt created a massive housing bubble but also created bubbles in the auto industry, student loan market, and other areas that were financed induced.  Industries where banks are heavily involved have somehow turned out to harm the working and middle class of the country.

Many financed their lifestyles through credit cards:

We have dropped from the peak of nearly $1 trillion in credit card debt down to approximately $850 billion in credit card debt.  Yet this contraction didn’t happen because people started paying down debts.  This has occurred through bank write-downs and many of the bailed out banks constricting access to credit cards to the American public.  In a way, this is what should have been done decades ago.  But what is troubling is that banks used this as an excuse and reason for receiving trillions of dollars in U.S. taxpayer money.  The bailout funds were to keep lending going so people could use the funds to live in their debt fantasy.  Well that fantasy has ended for the middle class but banks can continue on pretending and living in their fairytale world where taxpayer money and bailouts are somehow congruent with a free market.  Retail spending has contracted because people no longer have access to the amount of debt that was available only a few years ago.

If you want to see the new royalty in America, just look at the below:

Source:  Institute for Policy Studies

I’ve talked about the distribution of wealth in the U.S. in many articles but the above shows a solid plutocracy is already here.  Wealth is the key issue.  As many people are now finding out simply having a massive home with a jumbo mortgage and a leased foreign car is no sign of wealth.  In fact, that can be taken from you quickly (and it is by the number of foreclosures and repossessions we are witnessing).  But true wealth is actually owning the stock, or share of ownership in companies in the U.S.

“The above chart shows that half of all stock wealth is concentrated with the top 1 percent.  In fact, over 90 percent of Americans in the lower rungs own roughly 9 percent of all the stock wealth.  This is why the stock market is largely a game for the rich and jobs are largely a game for the rest of us.”

We are at a major crossroads for the U.S.  If action isn’t taken soon this massive inequality will dig deeper and the middle class will lose more and more people as the economy knocks people off the treadmill.  If we follow the money, our government, Democrat or Republican is largely bought out by the Wall Street cause.  Money is shifted to the least productive sector of finance at the expense of building real tangible assets that help the majority.  The real fairytale going on today is believing that our government and Wall Street are looking out for the economic good of the entire country.  Ask the 40 million people on food assistance how things are going.  Ask the over 15 million Americans with no job how the economy is progressing.  Let us ask the millions that are being foreclosed on how solid growth is.  For big banks, all is well and this is reflected by their billion dollar profits since they are stealing from taxpayers and gambling on Wall Street.  Not even a Disney fantasy is this outlandish.

My Budget360