The latest news out of the US really was good. But one question remains: is the US engaged in some kind of Ponzi Scheme or is the recovery real?
Here is the idea: you borrow, say, £100 off one set of people, and £200 off another set. You use the £200 loan to repay the first set, giving them, say, £130 back. So happy are these people with their profit, that when you go back to them asking for a £400 loan they gladly oblige. You can then use the £400 loan to repay the £200 loan and provide a nice profit for the backers too. You can carry on like that right up to the moment when you run out of places to go to raise money.
That’s what Bernard Madoff did; it is what Charles Ponzi did in the 1920s. And it is what we call a Ponzi Scheme.
The question is, however, whether the word Ponzi Scheme applies to the US economy. The answer may surprise you.
US consumer confidence, as measured by the Conference Board, rose to 76.2 in May, which was the highest reading since January 2008. It may be the strongest evidence yet that the US economy is on the road to recovery.
However, it might be worth asking why? US stocks are up, as are US house prices, which makes US consumers feel a good deal happier. In the US, stock market performance is more closely correlated with consumer confidence than in the UK, where our obsession with house prices is all pervasive.
But why are US stocks up? At least one of the reasons given for some of the rises seen in recent months is that US consumer confidence has improved. Do you see why there is a slight Ponzi Scheme feel about it all?
There is another reason for buoyant stock prices, however, and that reason is QE. So the Fed buys bonds, forcing their price up. Other assets seem cheap in comparison, so they rise in price, and thus US consumers feel more confident. If you think this has a whiff of Ponzi Scheme, you are not alone.
It is just that when we look at the macro economy things are different. When consumers are more confident, they spend more, and when they spend more, companies sell more stuff, wages rise, investment goes up, and maybe we see more innovation as a result of this. This drives up stock prices and in turn US consumer confidence. Yes it is like a Ponzi Scheme, but the difference is that it can create real wealth.
Maybe all growth we have seen over the last two hundred years is built on a Ponzi Scheme, but on this occasion it is as if snake oil has turned into nectar.
© Investment & Business News 2013