Americans Cut Back sharply on Spending

Finally, the headline we've been waiting for:

"Americans cut back sharply on spending," says the New York Times.

The news is not yet official. Maybe the NYT is jumping the gun. But evidence from chain stores, credit card companies and consumer confidence surveys all points in the same direction - down. "At every level of American society," says the NYT , "from working class to the wealthy, people are spending less money."

December was a "blood bath" for retailers, the paper continues, because consumers are worried about a coming recession. They're afraid to open their wallets, for fear that the few dollars they have left may be hard to replace.

So far, reports show earnings to be holding up, but jobs are disappearing. Even on Wall Street - or maybe, especially on Wall Street - the days of easy employment and easy money seem to be behind us. Citigroup, for example, says that it will lay off 24,000 workers this year...as it tries to recover from losses (write-offs) of about $24 billion.

Of course, the fall-off in consumer spending looked inevitable to us. When house prices peaked out, we wondered how long consumers could continue spending money they didn't have on things they didn't need. The answer: longer than we thought.

But now, the unavoidable seems to be happening: the NYT says so. And if the cut back continues - as also seems inevitable - the result will be an economic slump.

How bad? How long? Those who know the answers to those questions do not write financial opinions. We doubt they breathe.

What we know now is what we have known all along. At the end of the credit expansion - especially one as irrationally exuberant as the one we've just lived through - there is Hell to pay . People do not like paying their debts to the devil. Instead, they seek ways to duck and dodge...or lay the cost onto someone else.

Central bankers and politicians, working diligently over the last four decades, have not really mastered the business cycle...nor have they been able to trail rainbows to the pots of gold said to be at their end. Instead, what they have done is elaborated the art of socializing risk. That is, they've found new and more socially acceptable ways of taking losses from those who deserve them and passing them along to the general public. This is known popularly as "inflation," a word that describes the process of jacking up consumer prices without the consumer understanding why. The consumers' cost of living goes up...but speculators, debtors, investors and leveraged house buyers are able to moderate their losses. For a while, the authorities look like miracle workers. Politicians are re-elected. Central bankers are praised for keeping the economy growing.

Today, we have activist central banks and governments in America and England. (The central bank of Europe is still not sure; it will make up its mind when Spain and Ireland start to howl, we predict.) They are ready to do whatever it takes to avoid a serious slump. In America, they cut rates and inject liquidity. In Britain, they are even willing to nationalize a major bank. The idea everywhere is the same - to disguise losses by sharing them out onto the public.

"Inflation is immoral," said Congressman Ron Paul when we sat down with him a few months ago.

"It's immoral in the sense because it steals, it steals value. If you double the money supply and your prices go up twice as much, it's an invisible hidden tax. But the real immorality here is that some people pay higher prices than others. So if you're in a middle class or especially in low middle income, your prices might be going up 15% a year...and somebody on Wall Street might be working leverage buyouts and making billions of dollars and they don't have to worry about the rising costs of living.

"This to me is an immoral act that is prohibited by the constitution and the outcome is always tragic."

We interviewed Ron Paul for our documentary, I.O.U.S.A. , which after close to two years of work, is finally coming to fruition. As many of our dear readers know, we will be premiering the film at the Sundance Film Festival this coming Saturday, January 19. If any of our readers are in the Park City/Salt Lake City area over the next two weeks, please let us know.

Your editor is taking a break from traveling (keep reading today's issue and you'll find out why), but Short Fuse and Addison will be there - so drop the Fuse a line at kincontrera@dailyreckoning.com if you plan on coming to Sundance. And for a full list of the movies that will be screening see here:

Sundance Film Festival: http://www.sundance.org/festival/film_events/alphabetical.asp

Gold, anticipating weaker paper money, shot up over $900 yesterday. The commodity index hit a new all-time high, just shy of 500.

And despite this gush of inflation inspired by the custodians of our money, the number of bonds said to be in distress has risen 800% in the last six months. And Moody's predicts a default rate this year, five times higher than 2007.

The end of a credit expansion is not nearly as much fun for consumers and investors as the beginning of one. The end of a credit cycle is only fun for people who own gold...people who went short on the excesses of the easy money period...and people write financial commentaries like The Daily Reckoning .

Bill Bonner
for The Daily Reckoning Australia

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