Can a Consumer Economy Boom If Consumers Have Less Money?


Summer begins in 3 days. We can hardly wait. We predict it will be a killer.

Several interesting things are likely to happen this summer.

1) Unemployment rates will go up.

2) Rising joblessness will increase rates of defaults, foreclosures, and bankruptcies. Not just at the consumer level – but throughout the system…including banks, states, businesses, as well as households

3) The stock market will take a dive as earnings fall and investors realize that there will be no quick recovery

Oh…and one more thing: U.S. bonds could collapse. But watch out…here’s where it gets tricky. Another swoon in the stock market could send investors running for the smelling salts in the bond market. A collapse of bond prices, on the other hand, could send them helter skelter into stocks.

Yesterday, the Dow rose 7 points. Oil held at $71. The dollar lost a little ground – to $1.39 per euro. And gold added 3 bucks.

It is impossible to predict what will happen – or when – in the markets. So let us turn our attention to the real economy. Here, we see the picture more clearly: We’re in a depression. We write depression with a small ‘d.’ We’re saving the big one for later.

Few economists or analysts will tell you we’re in a depression. They’re looking at “green shoots” and rising trendlines. They’d do better to read a little history. Such as the history of the Great Depression.

Martin Wolf in the Financial Times (reporting the results of a study by two American professors):

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression… This is a Depression-sized event.”

Yesterday, we proposed two sine qua non for a new boom. Either the feds revive the old economy – by getting people to borrow and spend more money. Or, the mistakes of the past must be corrected…whereupon new investment and growth can take place. While the free market is busy working on the latter, central banks and national governments all over the world are trying to stop it. They’ve got the voters and campaign contributors to answer to, none of whom wants to get what he deserves. Instead, they’re hoping to revive the Bubble Epoque. Citizens are already up to their necks in debt; but the feds raise the water level!

This flood of fed liquidity seems to be raising boats and animal spirits among speculators. But it is doing nothing to revive the real economy.

“Consumer Costs Fall Most in Six Decades,” reports Bloomberg. Europe is already in deflation. America is not far behind. We had a hard time following the Bloomberg report. It said consumer prices were 1.3% below those of 12 months ago. We don’t believe that’s true. What we think Bloomberg meant to say was that prices are increasing at the slowest pace in 6 decades…but, for the moment, inflation is still (barely) positive.

With prices falling, the last thing the feds are worrying about is inflation. Except that there isn’t any. And they’re going to worry a lot more over the summer, when the hot sun beats down on a lifeless economy and it becomes obvious that their revival efforts have failed.

Global commerce has fallen in line with the Great Depression. That means producers don’t need to produce so much…and don’t need so many people to produce it. Jobs are lost. And then the people who lose their jobs don’t go out to restaurants and malls so much…so more jobs are lost.

These job losses take time to show up. And then they take time to “ripen.” People tend to have a little something set aside for a rainy day – or at least, unemployment compensation. But after a few weeks of stormy weather, the reserves are exhausted. Then…they have to cut back much more.

USA Today asked people: “If you lost your job, how long could you afford to pay for your own health insurance?” More than 65% of respondents said they could only manage for 6 months or less.

In America “there hasn’t been a shock like this since the de-
mobilization of millions of soldiers following WWII: something like 3 million unemployed people are going to fall out of the safety net in the third quarter. With their families, that’s about 10 million people who will sink suddenly into deep poverty,” says GEAB a private research service headquartered in Paris. The group anticipates a “Very Great Depression” coming to the United States.

More than three million jobs have been lost in the United States during the last five months. As these out-of-work cases ripen, there will be some rotten fruit falling to ground.

There are also the millions who are working fewer hours and earning less money. In fact, the number of hours worked per week has fallen to a record low.

Where do people without jobs, without incomes, without savings – and without benefits – shop? What money do they spend? How does a consumer economy launch a boom when consumers have less money to spend?

These questions have obvious answers and obvious implications: there ain’t going to be any consumer spending boom in the U.S.A….not this summer…and probably not for many summers to come. Martin Wolf explains why:

“Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process.”

If we assume that debt levels need to go back to where they were before the Bubble Epoque…well, let’s say to 200% of GDP just to make the math easy…that means 170% of GDP worth of debt needs to be paid off. That’s $20 trillion, in round numbers – or about 40% of the total. At 6% per year, even if households kept paying off debt at the current rate it would still take nearly 7 years to get household debt down to pre-bubble levels.

Then, of course, there is the government debt – now expanding faster than ever. The United States has the biggest deficit – even as a percentage of GDP – of any serious country in the world. The U.S. deficit is 12% or 13% of GDP. Compare that to Russia at 2.6%…Spain at 6%…France at 5%…Brazil at 1.3%…. Even Argentina has a much smaller deficit than the US – only 3.6% of GDP.

(More on the pampas tomorrow….)

But don’t worry about it. The ‘Committee to Save the World, Part II’ is on the case. Geithner, Bernanke and Summers are staying in the office throughout the hot months. They kept us out of trouble so far, didn’t they?

So enjoy the beach!

The United States has entered the Third Stage of a great nation. The Political Stage.

In the late 20th century, power and money moved from the banks of the Monongahela to the banks of the Hudson. Now they’re moving again – to the banks of the Potomac. Washington calls the shots.

“Obama Blueprints Deepen Federal Role in Markets,” says a headline in yesterday’s Washington Post.

Of course, this change didn’t happen overnight. George W. Bush was a trailblazer – turning ‘conservatives!’ into big spending activists. And the business community – particularly the banks – saw it coming and got ready.

In 2001 the banking industry spent $5 million on lobbying in Washington. The total went up every year. By 2008, they were spending $20 million. Campaign contributions from bankers increased too…from only $4 million from the bankers’ political action committees in 2000 to $8 million last year.

Judging from the bailouts given to Wall Street last year, this investment paid off handsomely.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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2 Comments on "Can a Consumer Economy Boom If Consumers Have Less Money?"

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7 years 4 months ago

Nice selective quote Bill. What a journalist you are!

Never let the facts get in the way of a good story… you should write for The Sun in the UK.

Jon Bain
7 years 4 months ago

you’re taking the wrong drugs

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