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.