US Consumers Still Spending Despite Rising Debt, Falling Wages

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“All is well?”

We don’t believe it. All is not well at all. Friday, the Dow fell nearly 250 points. Nothing to get worried about in itself. But there is plenty to worry about…and in the last few weeks, investors have begun to worry.

Old timers will remind us that stocks always climb “a wall of worry.” Yes, they do climb a wall of worry when they have been worried down into a hole. But when they are near a top…prices rise against a wall of insouciance and fall against a wall of worry. After a long decline, their worries give them something to hold onto as they hoist themselves out. After a long boom, worries are like lead weights, dragging them down.

We were intrigued last week, when retail reports showed consumers still spending.

Where were they getting the money, we wondered? Besides, surely consumers must be getting worried. They are earning less than they did five years ago. And their main source of financing – their houses – are no longer rising in price. One in seven subprime mortgage payers is in arrears. “August home sales in major plunge,” reports the L.A. Business Journal.

Late payments are rising on credit card debt too.

And to make matters worse, people are losing their jobs. Unemployment unexpectedly rose in the latest reporting period – which is what triggered Friday’s sell-off.

“The hangover may be here,” says the Wall Street Journal. Maybe…but word has yet to work its way down from Wall Street to the trailer parks and subprime suburbs. Despite all these things to worry about, Americans don’t seem to be worried at all. The party’s still going on!

“Americans living beyond their means,” is a recent headline from MarketWatch. This must be a headline they keep laying around the shop, like an adjustable wrench, we thought. It would have been handy anytime in the last 20 years.

But the folks at MarketWatch were referring to current events. The same spending news that set us to wondering set their reporters to work too. They called Paul Kasriel at Northern Trust and posed the question: How is it possible that consumer spending is going up?

“There are people who deny man walked on the moon, and there are people who will deny this, too,” he replied. “But the data are overwhelming that households are spending more than their income.”

Americans are still borrowing money, in other words – even at higher rates and on stiffer terms.

This is hardly good news. It can hold an economy together for a while, we guess – but not for very long.

Not that the feds aren’t determined to hold off the much-needed correction – in the worst possible way. What is the worst possible way to postpone a correction caused by too much debt? Give them more credit, of course!

So far, the central banks have cut the discount rate…and word on the street is that they’ll probably cut the key Fed funds rate the next time they meet. And here comes Senator Charles Schumer of New York with more flim-flam – a bill to allow Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to buy larger mortgages. Fannie and Freddie were set up to help people of modest means buy houses, by taking the credit risk off the hands of those who deserve it and spreading it out among investors and taxpayers. But we live in an age of Marxism for everyone. So now the rich, too, will get more credit from the taxpayers. That is the real genius of the present bubble – it allows buyers to buy what they don’t need with money they don’t have…while the financial intermediaries – lenders and speculators – are able to make their fees and pass along the risks to pensioners, investors, and taxpayers.

What a glorious system! It’s really too bad that it may now be coming apart…it has been so much fun to watch.

Bill Bonner
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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Comments

  1. Is that spending nominal or adjusted?

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  2. You keep wondering when people are going to wake up and face reality–and be rational in response. This is like my ever-present wondering when we’re going to wake up and see being fat as ugly and unhealthy, or when are we going to wake up and reverse the moral slumming into which we have fallen…And, of course, the answer in your case and mine is–never. This is like waiting for Godot or waiting for the second coming of an imaginary character.

    As for why it is that we refuse to face reality in the economic sphere and why the poor keep borrowing and spending, well the idea is this: If we’re going to fall, we’re going to take the whole thing down with us, and everyone will suffer and everyone will be in the same bag…So, quit worrying, keep on spending (and trucking) and when judgment day comes, we can all get the government to print some more money.

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