Out for Blood

I can't believe the news today
Oh, I can't close my eyes and make it go away
How long
How long must we sing this song?
--U2

Bureaucrats have been chanting that credit is the 'lifeblood' of our economy. After Prof Depew points out the absurdity of this claim, Prof Shedlock carries the ball the rest of the way in his excellent follow-up piece.

Another name for credit is debt. An economy cannot thrive on a long term diet of debt. Instead, the lifeblood of an economy is savings. Savings permits capital formation, some of which may be prudently loaned out to improve productivity.

Given our low savings rate, where did all the lending and leverage come from? From fractional reserve banking. This gigantic Ponzi scheme permitted credit to be extended with no savings to back it up. As with all pyramid schemes, this one was certain to fail. Pinpointing the timing of the collapse, and from what height it would ultimately plummet, was the difficult thing.

Now we are seeking to rebuild the pyramid with another round of lending with no savings to support it.

A lifeblood of leverage leads to certain death. Time for a transfusion.