A recent article argues that the increasing demand for consumer credit is an indicator of increasing consumer confidence. The argument seems reasonable due to the way it is presented–there is an entirely different conclusion one would draw were the argument presented differently.
If you had a very low income, and few assets, yet people kept lending you money–money that greatly exceeded your assets–would that not suggest that these lenders had confidence in you? It may be that this confidence is unjustified–but we can infer its existence by the continued willingness of others to lend you money despite the fact that you appear to be ruined.
In just the same manner, we can infer the confidence that lenders have in a country by computing the ratio of a nation’s debt to its actual holdings of real money. A high ratio suggests great confidence–even though it could just as easily be a measure of ruin. In the case of the US, we have used the ratio of itsofficial debt to its official gold holdings. For other countries, we would have to include foreign currency holdings as “wealth”.
This post was published at Zero Hedge on 11/27/2014.
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