Condemned To Repetition

George Santayana memorably observed:  “Those who do not remember the past are condemned to repeat it.”

Hey, does anybody here remember 2008?

isantay001p1A report released yesterday by the Federal Reserve discloses that Americans have just set a new record for accumulated credit card debt.  The grasshoppers among us had saddled themselves with a total of $1.021 trillion in outstanding revolving credit in June, just edging out the previous record of $1.02 trillion set in April 2008.  Total household debt in the U.S., which totes up housing, auto, student loan, and credit card debt, reached a new record of $12.72 trillion in March, which also passes its 2008 peak level.

Of course, those of us who do remember the past recall what happened in and around 2008 — banks failed, the subprime mortgage bubble burst, and the economy was thrown into the Great Recession.  For a while, Americans reacted by tightening their belts, paying down their credit card debt, and getting rid of some credit cards — but those days of responsible consumer behavior apparently are long over.  Recently, credit card debt has been growing at an annual rate of 4.9%, and more consumers are getting access to credit cards.  More than 171 million consumers had access to credit cards in the first quarter of 2017, which is the highest such number since 2005, when about 162.5 million people had access to credit cards.  And some banks have made the conscious decision to provide credit cards to people with subprime credit scores.

Gee, what could go wrong with this scenario?

It’s all not-so-vaguely and scarily familiar, but a lot of people apparently just don’t care.  They think times are good now, and therefore times will always be good — so why not use that credit card to buy another impulse purchase consumer good that they don’t really need?  The problem is that, in our interconnected economy, the irresponsibility of the grasshoppers can pull down the ants among us, too.  If the heavy credit card borrowers start defaulting on their debts en masse, and banks and businesses start feeling the pinch, we’ll feel the unfortunate results, too.

If Santayana were still with us, maybe he’d change his famous statement to read:  “Those of us who remember the past but are unfortunate enough to live with other people who do not remember the past are condemned to repeat it, whether we want to or not.”

Argentina Follows The Familiar Downward Spiral

George Santayana famously observed: “Those who cannot remember the past are condemned to repeat it.” We’re seeing that wisdom play out, again, in Argentina.

Argentina is an economic basket case. Under the government of its leader, Cristina Fernández de Kirchner, Argentina has spent lavishly on social programs and nationalized some industries. Argentina doesn’t have access to global credit markets since it defaulted on its debt obligations in 2001 and 2002. So the government is spending its dwindling reserves and seeking to devalue its currency — and in the meantime the Argentine peso is plummeting in value against the dollar and inflation is raging. The peso lost 19 percent of its value in January alone and inflation is somewhere above 25 percent.

Rather than learning the obvious lesson and ending the policies that are preventing free markets from operating, Argentina has gone in the opposite direction. The government blames supermarkets and oil companies for the inflation, and it placed caps on the prices of certain common goods sold at stores. Not surprisingly, those stores promptly began reporting shortages of the price-controlled items, because manufacturers and other suppliers obviously aren’t going to be pumping out goods that they can’t sell at a profit. Why would any business ship its goods to be sold in a price-controlled hyperinflation zone when it could just as easily send those goods to be sold in countries with rational economic policies? In Argentina, however, the government responded by fining the retailers and blaming their executives for raising prices.

We’ve seen this story again and again, in Latin America, in the Soviet Union, and in every other country that has adopted economic policies that interfere with the law of supply and demand and hinder the operation of free markets. Argentina will eventually experience a crash, as inflation spirals out of control and shortages become even more acute. But will it actually learn and take to heart the lesson it should have learned before?