A correction is always equal and opposite to the deception that preceded it. You can quote us on that, dear reader.
A correction is always deflationary too. Delusions and hopes push up asset prices. Reality and despair pull them back down. The latest figures show M2 – a measure of the money supply – no longer growing. True, the feds are desperately trying to increase the money supply with bailouts and tax rebates. But the bankers are running scared. They get their hands on some hard cash…and they want to hold onto it as long as possible. They figure they might need it.
This is the phenomenon that Keynes described as “pushing on a string.” The feds push. But the string bends.
Of course, it’s not just the bankers. Remember, bankers act like retail investors – and householders. And right now, they’re all feeling a bit under stress and looking for stray coins under the seat cushions.
Unemployment is rising. It is projected to hit more than 6% before the end of the year. In the last major recession – of the early ’90s – unemployment hit 7.8%. It could well reach up to 7% or 8%…or higher…this time too.
The combination of falling employment (including overtime and so forth) and falling house prices makes it almost impossible for the consumer to continue consuming in the manner to which he has become accustomed. We are watching the retail sales figures closely for proof. Broadly, from our great distance, the figures show little sign of a let-up in consumer spending. But when you look more closely, the picture is more interesting.
Consumer spending continued to rise in the last quarter, for example. But there were three important nuances:
First, most of the growth in consumption spending is no longer coming from the consumer. It is the government that is doing the spending. The feds are stepping up to the plate to try to compensate for weakening consumer spending (they don’t know they are doing this…they are just doing what comes naturally). Federal government spending rose at a real rate of 6.7% in the last quarter, while personal consumption rose only 1.5%.
Second, consumer spending is not even keeping up with consumer incomes. The feds handed out billions in tax rebates, which boosted incomes by 4% – more than twice the level of consumer spending increases. This tells us that consumers are trying to cut back.
But third, they’re finding it especially hard to cut back because prices are still rising. Ah, here’s the real complication. It’s a deflationary correction – we see that clearly, through our binoculars. But consumer prices are still going up. In June, consumer prices rose 0.8%. Doesn’t seem like much, but multiply that times twelve and you have an annual rate of nearly 10%. Prices for the essentials – food and fuel – have risen so much that the consumer has to spend all his money just to keep up. The broad figures show consumer spending rising…but the consumer is actually consuming less. He’s eating out less – so the restaurants are failing. He’s buying less – so the retailers are hurting. And he’s driving less – so gasoline sales, in gallons, are actually going down.
And pity the poor baby boomers! They’ve lived their whole lives with a pot of honey in their hands. Save money? Why bother? Na na na na live for today! The economy was always expanding…they were always getting richer…jobs were always plentiful…and so were credit cards. Now though, the tables are turning against the boomers. When companies lay off employees – they get rid of the middle-aged, expensive workers – the baby boomers. And since the poor boomers never bothered to save money – and since their houses are losing value – they now face retirement with no money in their pockets and no way to get more.
And now, even when they save money, they get kicked in the derriere. Interest rates are so low, they make almost nothing.
What are the poor baby boomers to do? D-O-W-N-S-I-Z-E in a hurry…
for The Daily Reckoning Australia