There’s a confusing and conflicting array of data and numbers being bandied around about the state of the economy. Reports on this or that new number give a wide variety of pictures about how things are going.

Oh no! Job numbers are down!
Oh yes! Manufacturing orders are up!
Oh yes! The stock market is up!
Oh no! Housing starts are down!
Wait…but home prices are up!
We’re losing our shirts!
No, the recession is actually over – everyone celebrate!

What does it all mean? It seems like the more information we have, the more confused we get.

There’s a problem with the way we are using all these numbers. Before explaining, I’d like to introduce a concept:

THE REAL ECONOMY

The economy is actually split into two different parts – factions we might describe as real and fake. The “real economy” is exactly what it purports to be – the portion of the economy that is real. The fake economy is, in certain crucial ways, artificial. What’s the difference? The real economy is what people themselves are willing to do with their time, energy, and resources. The fake one is dependant on what government does with the resources that it gets from borrowing, printing money, and confiscating from us.

I should be clear that not everything that the government does is “fake economy”. There’s nothing fake about a government takeover of health care, for example. That portion of the economy will be real regardless of who is running it. I am talking about things that, if government wasn’t doing them, they would not be done at all. That is the fake economy.

Example: Recently our leaders in Washington decided that Americans weren’t buying enough cars. American auto manufacturers were already being kept on life support by tens of billions of government largesse, but still people weren’t buying enough of their cars to make them healthy again. So, to support those companies and their unions, government pledged three billion dollars of our money to subsidize the purchase of new autos.

Predictably, auto sales during this time were extraordinary, as consumers either advanced a planned auto purchase to take advantage of the program, or were convinced to buy autos they didn’t need and couldn’t otherwise afford.

Due to the prominence and popularity of this program (which you probably remember as Cash for Clunkers), there was no risk of people thinking that improved auto sales meant the economy was recovering. But government is spending trillions of dollars every year right now to prop up the economy, and its activities are affecting things in ways that are very difficult to measure.

(This, by the way, is the role government tries to play in economic downturns. Rather than tough it out through the trough of a depression before things eventually improve, government papers things over. People are too poor and scared to buy anything right now, so government steps with loads of money, spending to make up some of the difference. Essentially, government deficit spending replaces consumer spending and investment, in hopes that this will lessen the severe parts of a depression. By providing artificial demand for cars, houses, stocks and so forth, the government hopes to gin things up until the storm is over and the real economy has recovered.)

Now we can circle back to the confusion about what’s really going on in the economy. We already know that the fake economy is doing great – free money from government for people to do things that no one else is willing to pay for. What we really want to see is an improvement in the REAL economy – people being willing and able to spend more of their OWN money and invest and work hard and so forth. Unfortunately, these two economies are very difficult to separate and the economic numbers that get reported usually include the fake numbers as well. Thus, when (for example) home sales go up, it is hard to tell how much is because people really want new houses and are willing to sacrifice to get them, or if they were just doing it because government made it practically free and riskless to buy one. It’s like holding a magnet next to a compass and then trying to point which way is north.

This is something people have a hard time perceiving. We are very used to relying on certain measures to describe economic progress. Numbers that describe unemployment, real estate, and the stock market used to give a somewhat more trustworthy indication of how things were going, but right now they are largely reflecting the effectiveness of various government programs, rather than any underlying strength and optimism. Housing and stock market numbers in particular are so heavily reliant on government money and support that they have almost no meaning right now.

So, if all the various measures of economic productivity are tainted by meddlers in Washington, what SHOULD we be paying attention to so we can understand how things are really going?

Well, one of the main causes of our ongoing depression is the over-indebtedness of the American consumer. Beguiled by easy credit and the false promises of an ownership society where everyone owns a house and gets rich, Americans have gone into debt at levels that haven’t been seen since the run-up to our last great depression. (Our government is also assuming trillions of dollars of debt every year, but here I am talking just about private non-government debt.) Over-leveraged and deeply in debt, Americans have had no stomach for the investment, indulgence and consumption that are such a large part of our economy. Certainly American debt levels will have to decrease – a lot – before the sort of recovery Wall Street and Washington are waiting for can happen. See the graph.



It shows the total debt held by Americans, in trillions of dollars. Since 1997 the amount has more than doubled, before finally leveling off at the start of the depression last fall.



So at least it isn’t going UP any more, but it’s rather distressing to see that, in more than a year, the number hasn’t moved down very much. There’s still a long way to go, and Americans, jobless and living in homes worth a fraction of their previous value, are having a hard time managing it. Until we work off a significant portion of this debt, it will be hard enough for people to pay for food and mortgages, much less the conspicuous consumption that fueled our chimerical global boom.

For all its importance, this important statistic has been largely ignored by government and the media. Instead, our leaders are wasting time and trillions of dollars trying to maintain an artificial status quo. In fact, by subsidizing and encouraging big-ticket purchases, government programs like the first-time homebuyer’s credit and Cash for Clunkers have served to INCREASE consumer debt. They are pushing us in exactly the wrong direction right now.