First Drop in Consumer Spending in Decades

"Shoppers cut spending," says the New York Times. Analysts think we will see the first quarterly drop in consumer spending in nearly 2 decades.

"Crisis hits home," adds the Boston Globe.

Elsewhere in the financial news is collaborating evidence.

"Big discounts fail to lure shoppers," reports the Wall Street Journal. Restaurants are empty. Shopping malls are not even attracting strollers and gawkers - let alone people with money to spend. Auto lots are so quiet the salesmen take turns pretending to be customers - just to keep their skills at-the-ready. Even the private jet business is in a tailspin.

But don't worry, dear reader. It's not the end of the world. That's just the way the world works.

Economist Irving Fisher described the process in 1933. When people get too far in debt, there typically comes a moment of panic when they rush to sell assets in order to pay it down. They know debt is a killer - especially when there is a danger they may lose their source of revenue. Then, as more and more people - and here we may as well be talking about big financial institutions - dump assets, prices collapse. This causes even more dumping. There's a "stampeded to liquidity," said Fisher, as people try to raise cash and get rid of dodgy 'assets.'

In other words, what is happening is just what you'd expect to happen. After a bubble, comes the crash. After a credit expansion comes a credit contraction. After life comes death.

So relax. It's all a part of the plan...a part of the way things are supposed to work.

And of course, the authorities are supposed to do foolish and counterproductive things too. Misters Smoot and Hawley are always on call - ready, willing, and eager to make a bigger mess. Mr. Hoover is always in office too...with Mr. Roosevelt right behind him. They're all more than happy to let the 'up' phase of a free economy take place. Heck, they'll even claim credit for it. But come the 'down' phase - and they swing into gear trying to prevent it from happening.

*** Hedge funds are back in the news. Years ago, we explained how they were a "heads I win; tails you lose" business. The managers take big bets, because they are rewarded with a large part of the gains - typically 20% - if they win the bets. And if they lose, it's not their money!

Sooner or later, the fund is bound to take a loss...and the customer is bound to pay for it. Sooner or later seems to be here now. Tontine Partners have lost 66% of their money so far this year. Copper River is down 55%. Maverick Levered is 35% in the hole. Tremblant is off 28%.

Hedge fund investors are going to regret giving all that money to the managers; they're going to need it.

Bill Bonner
for The Daily Reckoning Australia

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