Is That a Real Economy or is that a Sears Economy?

With a tip of the hat to the late, great Frank Zappa, who famously skewered all manner and form of phoniness with comments like the title of this post, almost all economic discourse has become contaminated by a failure to distinguish between real, sustainable economic activity and the largely fleeting credit bubble driven activity we have seen over the past few years. This perversion of concepts like GDP, Recession, etc. has taken hold even among people who would normally know better, and is everywhere in the mainstream media. All the talk about “are we in a recession”, “when will growth return” blah blah blah glosses over the fundamental point that since at least 1997 or so a very significant part of the developed world economy has been a “false economy” supported largely by credit expansion. The problem with excessive credit creation (or money printing, a different but related phenomenon) is not just the debt-deflation hangover that is just now getting started, it is the complete distortion of investment decisions and asset/income stream valuation that results. The Mainstream media is even more clueless than usual on this topic since any talk of “return to growth” implies that there has been real growth in the past few years. Subtracting out the impact of cash-out refis (as Paul Kasriel) and others have done and the impact of overbuilding, and the impact of the artificially inflated lending administration, real-estate activity, and some of the earnings of all of the businesses and people whose receive money form all of the above activity (i.e. essentially everyone in the developed world and a good portion of everyone else) …subtracting all that out suggests there was little if any real growth in western , “developed world” economies.


For a clear analogy, think of the following, visual…You buy a Lake-Front house and move in, enjoying the beauty of the lake. You paid a significant premium but you justify it because you believe you can always sell the house at an equivalent or greater premium and the beauty of the scene is worth the premium. Then one day you come home and the lake is gone and there is nothing but a muddy field. You walk into the field and notice that in the distance on someone else’s property there is a small stream, but there is no other water in sight. A bit of investigation uncovers that in fact the lake was made by a dam made by beavers well downstream, and when the farmer downstream chased out the beavers and their handiwork, the lake was drained unlikely to ever return. What you fully believed was a permanent condition on which you made major commitments, is reveled to have been purely temporary and unlikely to be repeated in the same way anytime soon.

This may sound oversimplified, but you should care. A lot. Especially every time you see what looks like an investment bargain.

The detrimental affect of the false lake of an economy that was created by unsustainable credit duped millions of well-meaning meaning people in all corners of the globe into making fundamentally poor decisions ranging from the annoying to the disastrous. (And this ignores related nonsense like the likely exaggeration of GDP growth through the potential understatement of inflation.) However, unlike our simplistic visual above, the real lake of credit will take years to fully drain and the level of the original stream (economy) is fundamentally unknowable (take my word for it...more on the science of why this is so in a future post.) Most importantly for wealth management and investing, investment decisions you are making right now need to be evaluated in the context of what degree they are supported by a truly real and sustainable economy.

A future post will look at how to do this on the spectrum of available investments.

What will real growth in the developed world economy require? Some ideas in no particular order:

- An increase in the savings rate (be careful with the Retail Sector)
- Opening up of new markets (normalization of relations with Cuba may become an economic necessity in the US, not an option)
- Far fewer imports and far greater exports, especially in the US
- Investment in productive resources, not speculation
- Stable currencies
- Immigration of talented individuals
- A halt to creeping socialism and protectionism


For a more formal discussion of the concept of a real vs. false economy, a review of Austrian Economics is a good place and a good place to start for that is at www.mises.org which Eclectic Wealth highly recommends.


Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.