The U.S. economy has for years been the strongest in the world, leading the rest of the countries. Our Daily Reckoning newsletter routinely gets reader responses saying, in effect, “How dare you impugn the superiority of the American economy! How dare you!” We’re rather thick-skinned, so the insults bounce off rather easily. But “facts are stubborn things.” The fact that the U.S. economy has outperformed the rest of the world in the past several years is easily explained: Our credit machine has been operating in overdrive nonstop. It is geared to accommodate unlimited credit for two purposes - consumption and financial speculation. Let’s look at these two things a little more deeply.

Credit is not the same thing as production, despite the fuzzy logic you get from the financial media. There is a severe imbalance between the huge amount of credit that goes into the economy and the minimal amount that goes into productive investment. Instead of moving to reign in these excesses and imbalances, under Greenspan, the Fed clearly opted to sustain and even to encourage them. I want to believe that under Bernanke, the Fed will do better, but so far, it is still customary to measure economic strength by simply comparing recent real GDP growth rates. It is pointed to as proof and applauded by U.S. economists when U.S. economic growth outscores Europe - like some kind of dysfunctional futbol match.

Financial speculation is equally unproductive. An investor puts up capital to generate a sustained and long-term growth plan. For example, buying and holding stocks is a form of investment and a sign that the investor has faith in the management of that company. Speculators don’t care about long-term growth. They want to get in and out of positions as quickly as possible, make a profit, and repeat the process. So speculative profits - especially those paid for with borrowed money - tend to be churned over and over in further speculation and increased spending. None of that money goes into investment in the long-term sense. The speculator is invested in short-term profits, nothing more. Even so, the speculator is today’s cowboy, the risk-taking, living-on-the-edge market hero willing to take big chances. He is seen as a guy with big stones because he’s staring the prospect of loss right in the eye.

Regards,

Addison Wiggin
The Daily Reckoning

P.S. The essay above is an excerpt of the second edition of Addison’s bestseller. If you haven’t purchased your updated copy of The Demise of the Dollar you can get this must-read here:

The Demise of the Dollar (And Why It’s Even Better for Your Investments)

Source: Pathological Consumption

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