Hyper Extension

"Son, your ego's writing checks your body can't cash."
--Commander Tom 'Stinger' Jordan (Top Gun)

Standard of living relates to how much of income is consumed as opposed to saved. Generally speaking, standard of living rises with consumption.

Standard of living can be elevated beyond income by borrowing, which permits, in the near term, greater consumption of resources than is possible by income. But such a situation is temporary. Over time, standard of living is likely to fall as individuals allocate greater portions of future income to pay off debt.

Standard of living can also be increased by consuming resources that have been saved in the past. This also is a temporary situation. Once savings have been consumed, then standard of living recedes to lower levels. Plus, no savings remain to buffer against future uncertainty or to invest in productivity enhancing projects.

Folks are recently enthused that Q4 GDP printed at about 5%. The worst must be over, so goes the thinking.

But economic laws are not swayed by hope or ignorance. Over the past year, we have borrowed even more resources to maintain an elevated standard of living that would undoubtedly be much lower otherwise. Standard of living is also being elevated by consumption of isolated pockets of remaining savings via taxes and inflation.

Sustainable increases in future standard of living comes from capital formation--from saving. They do not come from capital consumption--from consuming the saved capital we have left.

GDP increases generated by capital consumption are bad, not good. Given our current situation, lower GDP is necessary to pay down debt and improve capital stock.

Current actions being taken in the name of generating positive GDP growth cut the distance between us and squalor.