BANKRUPTCY BILL, HOUSING BUBBLE & THE ECONOMY

The new bankruptcy bill will hurt the economy in several different ways. Not only will it reduce consumer spending by reducing credit card expenditures, but it will help burst the housing bubble as well.

The new bankruptcy bill will make consumers less willing to spend money and less willing to use their credit cards to make large purchases. Those who would have otherwise been able to declare bankruptcy, will have to spend more of their money paying off their debts. They'll have less money to spend on consumer goods, especially homes.

Consumer spending and demand in this country are approximately 80-85% from income, and 15-20% from borrowed money. Inflation-adjusted hourly wages have decreased over the last year. They've decreased 1.2% over the last month, and 2.2% from since January of 2005. With consumer income decreasing, the reduced ability of consumers to borrow is going to have a much greater effect. Consumers are going to have much less spendable money.
Less spendable money, in addition to higher mortgage rates, will accelerate the bursting of the housing bubble. The super rich, who buy 30% of the homes sold in this country as investment, are not going to keep buying. They won't be able to profiteer by selling them at their current inflated prices. Still less people will be able to afford them. The market supply of homes will increase from "investors" trying to dump their homes before prices bottom out. When this happens, the Greenspan-created housing bubble will burst. And the real estate speculators are going to wish they'd invested in solid gold, instead of the hot air comprising the housing bubble balloon.

Bush's bankruptcy bill slant is just like his tax-cut slant. Preserve the wealth of the most affluent, at the expense of the less affluent. The alleged theory behind such high-end giveaways is to increase capital and investment. Even if that WERE the real reason for this slant (and it is not), it's illogical with our current economy. The markets are "glutted with capital" according to the Wall Street Journal. Other sources state business is "awash in cash." There is an abundance of investment capital. In contrast, there is NOT an abundance of investment opportunities.

Why aren't there more investment opportunities? Because there is NOT an "abundance" of spendable consumer dollars. Investment opportunities are the result of consumer DEMAND for products. That demand is created by consumer spending. Aggregate spendable consumer dollars limit aggregate consumer spending. As such, aggregate spendable consumer dollars limits investment opportunities. In order to increase investment opportunities, and the utility of investment capital, spendable consumer dollars need to increase. With declining incomes, this had been maintained by credit card spending and borrowing. The new bankruptcy legislation will reduce the addition to consumer spending that comes from credit cards and borrowing. Combined with rising interest rates, this contribution will be further reduced.

The new bankruptcy legislation will amount to a further maldistribution of wealth. Many people clearly see this. At least some people understand that the "means-of-consumption' and the "means-of-production" must be balanced. (Unfortunately, none of them work for the Bush Administration.) Business profits are NOT made by producing goods. They're made by SELLING goods. Someone needs to buy the goods for any profit to be made. Reducing spendable consumer dollars reduces this ability. No amount of increase in investment capital increases that ability. At the current time, economic growth will NOT occur by increasing available investment capital. It would occur from the investment of that capital in productive investment opportunities, but those investment opportunities are scarce. Again, those investment opportunities are created by consumer spending, and the demand it creates. Thus, consumer demand needs to receive more emphasis. Consumer demand is what limits our economic growth at present. Unfortunately, acknowledgment of this reality does not fit into Bush's "No-Corporation-Left-Behind" policies.

Bush policies clearly favor "means-of-production" over "means of consumption." The bankruptcy bill unbalances this even further. In so doing, it further reduces the utility of investment capital, while further increasing the investment capital excess over investment opportunities. We can't "grow" our economy this way. Building new production facilities with this capital has NO benefit whatsoever. Our current industrial capacity is underutilized. Current utilization rate is 79%. It was 85% at the end of Clinton's presidency. Further "growth" will only occur with increased utilization. Increased consumer demand increases that utilization. It will increase the demand for production by those facilities. Increased demand for production also increases demand for workers to create that production. Increased labor demand increases both the numbers of those working, and the wages of those already working. (increased demand ALWAYS increases price. In this case, that price is American wages.) We don't need to assist the rich, and increase their investment capital. We need to help consumers, and increase their purchasing power. This would create more investment OPPORTUNITIES. This helps business, as well as consumers. Some might describe these wealth-redistribution ideas as "share-the-wealth" concepts. But I call them "increase-the-wealth" concepts. I think many would agree.