Tuesday, September 29, 2009

Don't Stop Consuming

I read around 15 articles today that were important one way or another, but they all had a common denominator: All are well known problems that for the moment are being treated like they do not matter. Whether it is the FDIC taking in fees ahead of schedule to Fannie Mae delinquencies skyrocketing at an alarming rate, none of this matters right now. Rather than cover all these items tonight, I will instead focus on a concept I have thought about and mentioned here from time to time.

Don't Stop Consuming
The title of the section is a play on the Journey song "Don't Stop Believing", and you can sing the new words if you like.

I was reminded again today about the fragile way the US economy has evolved over time. We are told to no end that consumer spending is fully 70% of GDP in this country and the reasons how that all came about is beyond the scope of this article. Suffice to say that when the system is set up this way, spending must be a constant flow.

I was thinking about this today when I read a Mish Shedlock piece that highlighted a story unfolding in Japan:
Japan to Buy Pork to Boost Prices After Demand Drops
Now the pork angle is not my main point here, though the government rushing in to support prices is somewhat related.

We have seen the savings rate in this country go from an all time low of about zero for a while to a paltry 5% over the past year. 5%. With even a 5% reduction of money flow (and this is very simplified) our economy is dead in the water and relies on massive government spending to keep things afloat. 5%.

Another crazy percent story is if home prices fall, on average, 10% almost every bank in the mortgage business is flat out busted. 10%.

Notice a pattern here?

Unless you, the average man/woman on the street whom I believe 90% of my readers to be, are separated from basically all of your earnings the structure of the economy is put under stress. In a strange feedback loop, you have to work more just to keep your job so that consumption does not fall and then you lose your job. This is a winning plan.

Now I understand that all economies rely on spending to some degree and that commerce fuels growth and all that. We are talking about a 5% change is money flow (again WAY simplified) and the US is a mess.

Back when technology stocks were trading at unimaginable highs, the description most used was that they were "priced to perfection". What that actually was supposed to mean I am not sure, but it was clear after the bust those firms were not priced quite right. In a similar manner, the US consumer has been "Tapped to Perfection" which means they are expected to spend all of their income in this economic model.

As with most things, this works great until it does not. It is not hard to imagine a consumer that has:
-Seen their investments crater and burn 2 times in the last 10 years
-Seen their home value gyrate wildly and now sitting at multi year lows
-Seen their tax money given away to banks
-Seen their job shipped overseas
-Seen their bank close overnight
-Seen their future earnings burdened by overwhelming bailout guarantees
Decide it may be time to tone things down on the spending front.

This is a key point.

While we are deluged with FED officials and economists trying desperately to "stimulate demand" we have no discussion on the idea of demand at all. Maybe the days of 5 televisions (all plasma) per home are gone. Maybe the days of 4 cars per family of 4 are over. Maybe people will not swap out of their home every 3.5 years. Maybe people will stash 5% or more of their income in annuities or bonds instead of the stock market lottery game. Maybe people will make do with less. This would be perfectly reasonable, and one may even argue (I would) long overdue.

The problem is our system in no way can function this way. I call it "The Paradox of Intelligence". If the US consumer ever figures out that they are being gamed to spend every cent they have, they may not. If they do not the economy will suffer. Again, nice feedback loop. It is almost like it was designed that way!

I guess science officer/first officer Spock would urge:
"Spend all, and prosper"

Have a good night.


Anonymous said...


"It is almost like it was designed that way!"

That's because it is.


getyourselfconnected said...

Can it really be that simple and nefarious?

Anonymous said...


Social Mood Conspiring To Halt Reflation Attempts

It is happening around the world. Populist anger directed toward the financial industry (the creator of inflation) is forcing politicians into uncomfortable positions of austerity just as the politicians congratulate themselves for "saving the world." Social mood, an unstoppable force in both directions, is getting the better of what has almost unquestioningly been referred to as "the recovery."

Paradoxically, there are very few who actually want a recovery. I don't. None of my close friends do. Not if it means another bout of asset speculation, inflation and the degradation of social values that go along with it. As such, few of us are complying with the attempts to reflate. Most are unknowingly putting the kibosh on central bankers by resisting lower interest rates, saving, waiting for lower asset prices, and simplifying their lifestyles.

He probably put it better then I would have but I think it's a valid point just as it was in the 30's


Anonymous said...


Here is how Fatlibetrarian explains it. LOL, has some language that may not be appropriate for work.

Economic 9-11 Coming

He cracks me up sometimes.

mab said...

GYSC, Kevin,

Here's a few gems:

"If we all join hands and go buy a new SUV, everything will be all right," - Bob McTeer, Dallas Fed governor

"What we dearly want is for Americans to spend like Americans – to do the patriotic thing and go out and spend," - Bill McDonough, head of the New York Fed, October '01.

The financial industry, including the Fed, target CONsumption debt (credit card debt, mortgage debt), Why? It's wildly profitable and easy. It allows the financial industry to lay claim via leverage to future output and future inflation. People aren't just expected spend all their current income, they are expected to pledge all their future income and their share of the future inflation too. The game got so out of hand that all future output and inflation was spoken for many times over. Hence the meltdown.

Sadly, CONsumption debt is the road to ruin. Debt for investment is a different story, but that's a riskier endeavor.

Greensham and Bernanke have criminally mismanaged the financial system. What to do, there is not enough left for the hapless CONsumer to pledge to keep the debt pile afloat. No worries. Bernanke will print just enough to make the credtors whole. No harm (to the creditors) no foul.

GawainsGhost said...

Blame the Baby Boomers, the most narcissistic and inept generation to have ever disgraced the globe.

Given the world on a silver platter, they promptly turned it into a mound of crap on a paper plate.

No, seriously, look at the timeline. All of this began in the 80s, when the Boomers took over. The thing to understand about these guys is that they're all about defying convention, tradition. Everything has to be new, because all that is old is passe.

Suddenly, with the invention of the personal computer and development of the internet, there's all this talk about a new economy, a new way of doing business, a new way of getting rich! Hence, the dotcom bubble.

Of course, it all ignored basic market fundamentals, traditional rules for managing money, eternal principles for saving and investing, because these are old-fashioned and out of date. Well, that bubble burst.

So they turned around and created another new way of making money, financial innovation. These scams are all based on computer models, and Boomers love computer models because they're so new. Why save and use your own money, when you can borrow and use someone else's? Leverage! Leverage! That's the way to do it.

All this to finance their conceit, the lavish lifestyle of which they are so deserving, their sense of entitlement and pretence to superiority. What's going on here is this. Back in the day, the Middle Ages, only aristocrats got college educations. You had to be born noble and wealthy in order to be educated. So the Boomers, the most highly educated generation in history, naturally assumed that sense they were educated the were aristocrats. In other words, they were born to be noble and wealthy.

The conceit here is staggering. And as the old saying goes, pride goeth before a fall. Didn't take too long for them to crash the entire global economy, did it?

They quickly started to game the system, because after all the system was set up for them to game. Any new way of making money, and they jumped on it. Junk bonds, derivatives, securities, collateralized debt obligations, credit default swaps, and on and on. As long as it was based on a computer model, nothing could go wrong, right?

Wrong. Now they're paying the price for their vanity, watching their wealth evaporate before their horrified eyes. Serves them right.

By the way, the real cause of the real estate bubble was the elimination of down-payment requirements. This was done because it's so noble to give poor people a house they can't really afford, and because it was a new way of making money. Of course, like all things based on Boomer thinking, it was a total fraud.

As long as a buyer is required to put 10% or 20% down on the purchase of a home, it is virtually impossible to commit mortgage fraud. But, hey, 0% down, roll over closing costs, make the loan, bundle it into a security, sell it on the secondary market, when the inevitable default occurs, it's not your problem. Take the money and run.

The Boomers have destroyed the middle class, the backbone of this great country. They have ruined the education system, exported the manufacturing base, wrecked the economy, corrupted the political system, bankrupted the nation, and generally screwed everybody in the world, including themselves.

But, oh well, it was fun while it lasted. Too bad for the next generation. They didn't deserve to be noble and wealthy, after all.

sedentary state said...

>They've seen their investments crater and burn 2 times in the last 10 years.

Wow, twice in 10 years. And day by day they're working on a third by bidding up the market again.

Even dogs only burn their nose on the oven door once. If you had a dog this stupid you'd take him out behind the barn and put him out of his misery.

regular scheduled programming said...

>All this to finance their conceit, the lavish lifestyle of which they are so deserving...

Well said.

getyourselfconnected said...

"Given the world on a silver platter, they promptly turned it into a mound of crap on a paper plate."
Oh man that one had me rolling this morning in my cubicle, luckily I was the only one in that early!

I think you have mentioned you run a sports related site (would like to see it) but you should write some of this stuff down, its classic.