Miguel Ángel Boggiano – They are just lying to us

Whenever we read or listen to someone’s opinion, we have to try to find out why that person thinks the way she or he is doing it. May there be a clear interest related to the topic? Would it be convenient to say something in particular?

If someone asks to a cranberry producer about the qualities of this fruit, it is obvious that the answer will be charged with good comments about the properties: It has antioxidants, it helps the circulatory system, among many others.

In the current situation, if someone asks a corporate banker what perspectives there are about the upcoming economic situation, it is evident that she or he will answer that the worst has already happened. This person is practically obligated to give good predictions about the future because he or she needs that the situation does turn out to be that way. That is why we know the kind of answer we will get. Is the banker lying to us? More than that, I would say that we are asking someone who is too involved in the topic and cannot be impartial. In other words, we are finding the answer we were hoping to get.

In order to provide an example, we can make a reference to what happened with Bear Stearns investments, the same week before they had to get protection from JP Morgan. It was the president of the bank who denied once and again that they needed capital and kept assuring that the situation was under control. Was he lying to us? The best answer is to establish that “he could not tell us otherwise”. He was obligated to say that.

Nonetheless, the same situation happens with the Federal Reserve. Does anyone actually believe that the Fed was about to say, “honestly, the business banks have little capital and we have done a lousy job”? There is no way that could have happened. That is why it was quite predictable that the Fed was going to say that practically all banks had got over the stress tests.

In general terms, there are a lot of people involved in the market who need us to believe in a dramatic way that the worst has happened and that the global economy is stable. And since these actors are quite powerful, they achieve to “convince” (or should I say “cheat”?) a great part of the global population. However…

The economic data shows that the worst is far away from saying that it has already happened. But instead of making lists of different information and their causes and consequences, I will concentrate in something that I think is the core: The American consumer.

The American consumer has been the artificial element in the growth of the United States (and as a consequence, of many of the global economies) of the last decades. How is this artificial? Because they spend a lot more than what they can afford. In order to do this, there must be someone who lends, to finance.

In this way, the American consumer is facing the current crisis with a level of a debt that has never been seen before. This is not only in absolute terms, but also as a proportion of the GDP. The next graphic is eloquent: All the American economy is dramatically in debt.

The level of indebtedness of the “households” or families was 18% in 1933, while in 2008 it reaches 27%. It is evident that the situation has turned out to be a lot more suffocating.

But, why am I focusing in this comment? Because what the American government is trying to do is to make their consumers spend again. They need it more than ever! Nonetheless, after living for entire decades with growing deficits, they have had to start adjusting. The question is: How? The only possible way is by saving money. However, if the consumers start savings now (a natural answer to this unbalanced situation), it will only intensify the crisis. Which makes it obvious that it is a crisis that instead of reaching the end, it is just about to start.