Though the fear of inflation is minimal right now, government's deficit spending on this scale is bound to result in higher consumer price levels sometime. How long will it be before this good luck ends up kicking us in the derriere? How? We don't know, but look at this chart that appeared in The Wall Street Journal. The United States has found its Mt. Potosi.
The US money supply growth was fairly constant for the last 45 years. Then, under pressure from the stimulus/bailout programs, it exploded. Art Laffer says it is meaningless to compare it to anything in our history; nothing like this has ever happened before. He argues that inflation this time could be much worse than the inflation of the '70s, when the prime rate hit 21.5%. This is a new era!
"More Americans see sunny skies ahead," says a headline in USA Today. Elsewhere, Bloomberg reports that consumer spending is rising.
The Wall Street Journal, however, reports that savings rates are going up.
How can consumers increase spending and saving at the same time? We don't know. But the statistics are so jiggled and jived we have little faith in them.
The Richebächer Letter's Rob Parenteau is scratching his head at this contradiction in trends. "Oddly," he writes to his subscribers, "along with flat consumer spending, the gross personal saving rate has surged to nearly 7%, yet the unemployment rate has kept climbing. How is that combination possible? Specifically, where is the household sector getting the income growth to both increase saving and stabilize spending levels when job cuts remain alarmingly high?"
"If households try to hike their gross saving rate and the business sector does not increase its investment, then simple junior high algebra tells us that nominal incomes, especially profit incomes, will decline," continues Rob.
"The only way to avoid this outcome is for the trade deficit to improve or fiscal deficit spending to increase. The trade deficit has come a long way, but it is starting to stall again as consumer spending stabilizes and the pace of inventory reduction slows. The existing fiscal stimulus will have to do the trick until the household saving rate stabilizes and residential and nonresidential investment gets some traction."
In any case, be wary of statistics - they are furnished by government. And government has its own axes to grind and its own heads to cut off. For example, inflation numbers tend to be held down - in order to avoid costly adjustments to social security benefits. Unemployment statistics, too, tend to be understated. If joblessness was reported in the same way it was during the '30s, the figures would be much higher. More on this in an upcoming Daily Reckoning.
for The Daily Reckoning Australia
- Economists With Their One-stop Solution: Stimulate Consumer Spending
- The Percentage of the U.S. Economy Devoted to Consumer Spending Went Up and Up
- Saving Money, Not Spending it, is the Key to Getting Wealthier
- The Role of Consumer Spending in Phony Economic Growth
- Consumer Spending Falls Hard As Consumers Guard Their Wallets
About the Author
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.