Economists With Their One-stop Solution: Stimulate Consumer Spending

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When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was.

To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn’t enough oil in the world to allow US-style consumption for everyone.

Two weeks ago, Dubai gave us another wake-up call. Thought to be risk- free, since it was implicitly backed by all the oil in the Middle East, Dubai World nevertheless stopped paying its debts. And this week yet another bell banged our eyes open. Greece announced first that it would not try to reduce its deficits…then, that it would. Hearing the news, the financial world rolled over and went back to sleep. But The Wall Street Journal offered a hint of trouble to come: “Markets force Greek promise to slash deficit,” said its page one headline.

If markets could force the Greeks to trim their deficit – about 13% of GDP…not far from the US level – could they not force Britain and America too? Coming right to the point, the fixers face not just one crisis, but many. They have a growth model that no longer works. They have aging populations and social welfare obligations that can’t be met. They have limits on available resources, including the most basic ones – land, water, and energy. They have a money system headed for a crack-up, and an economic theory that was only effective when it wasn’t necessary. Now that it is needed, the Keynesian fix is useless. If a recovery depends on borrowed money, what do you do when lenders won’t give you any?

But let us backtrack to a smaller insight. Then we will stretch for a bigger one. Americans are supposed to be insatiable shoppers. For at least three decades, the world counted on it. It was the growth model for almost all the Asian manufacturing economies…and for resource producers everywhere. But as we approach the biggest shopping season of the year, a survey of consumers signals an earthquake. Americans plan to spend an average of 15% less during this holiday season than the year before. Only 35% say they will take advantage of post-Christmas sales, traditionally when the stores unload unwanted inventory. They seem to be satiable after all.

Push come to shove, Americans react like everyone else. Now, they are being shoved into a new world, very different from the one they have come to know. In 1973, the American working stiff went into a decline. His weekly earnings, in real terms, went down for the next 36 years. The typical worker earned the equivalent of $325 a week in 1973…adjusted to constant 1982 dollars. By US official accounting he was down to $275 a week in 2009. Unofficial estimates put the loss as high as two-thirds of his purchasing power.

Yet, his spending increased anyway. How? He squeezed the rest of the world. The US trade gap began to go seriously negative in 1992. By 2006-2007, foreigners were shipping to America nearly $900 billion more per year in goods and services than they received in exchange. This gave the typical American a standard of living few people could afford; too bad, he wasn’t one of them.

Now he’s up against billions of Patels and Hus. They work for less. They save more. They want more stuff too. And they’re suspicious of the dollar.

Their economies are growing faster…and better. Because they don’t have 50 years of accumulated success on their backs. That’s the trouble with success; it adds weight. In their heyday, the mature economies could afford to squander and regulate. But that trend, too, is reaching its limits. Even without the cost of ‘stimulus,’ practically all the world’s leading economies are headed for insolvency. And yet, this week, Paul Krugman gave his solution to the weak results from stimulus spending so far – add $2 trillion more!

All of a sudden, the most reliable givens of the past half a century aren’t given any more. Americans were the big winners of the post-WWII period. They got used to it. At first, they wanted to make things; later they just wanted to have them. And with the benefit of cheap oil and resources, and then cheap labor and cheap credit, they were able to get more stuff than any race ever had. Now they are shackled to it, unable to move forward or to back up.

Meanwhile, Europe – led by post-war neoclassical Jacques Rueff in France and Ludwig Erhard in Germany – pursued a different course. While Americans subsidized consumption, Europe taxed it. Credit was expensive, not cheap. And then, the European Central Bank had the great advantage of having a chief banker whom no one paid any attention to. He might talk about stimulating consumption, but he did nothing.

And now the world is reckoning with much more than a consumer debt bubble. It is reckoning with a depression on wheels…the end of the consumer spending era. We don’t know what kind of world will take its place. But it won’t be the one the feds are trying so desperately to save.

Until next time,

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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Comments

  1. Christmas retail expenditure is way down where I live in regional NSW. The local shopkeepers and business owners say that the absence of a Rudd $900 stimulous bonus is hitting them hard.

    Is the a bellwether? Probably, because actual employment levels are pretty solid. Military bases, universities & meat processors are all doing well and new suburbs are being subdivided at reasonable prices. There are plenty of ag jobs avilable that nobody (including a large population of long term unemployed) wants.

    What gives? For starters the exchange rate has hit primary producers very badly. They make practically nothing from some crops even though global prices remain pretty solid. The other key issue is that people with solid/stable jobs don’t want to spend any money. Consumers are behaving like many companies, paying down debt, hording cash and limiting unnecessary expenses.

    Coffee Addict
    December 22, 2009
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  2. If Christmas shopping is booming where you live tell us rather than just post one star against my anecdotal observation. I can only report what some retailers have said to me. The keyboard is in front of you..

    Cheers

    Coffee Addict
    December 22, 2009
    Reply
  3. Huh, I was just about to post similarly to yours CA. I asked two retailers last week and three more just today. Sales are down in all and dramatically so in non essentials. I’m rural QLD.
    I suspect there are sometimes those using this forum to create an alternate truth ie. in response to what you say about the one star you get for posting what are mostly simple observations. Convincing people that all is well when its not is waste of time. It wont postpone the inevitable by any tangible degree. Consumers will spend when they’re cashed up and save/pay down debt when they’re not.

    Lachlan Scanlan
    December 22, 2009
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  4. No idea what’s happening in Oz, CA / Lachlan; but the queues are far too long in SuperStores, London Drugs, WalMart, Sears, the Apple Store, Marks and Zellers, in Canada. It’s going gangbusters. We suspect WA is booming, but have little to verify that. As for the stars, they’re meaningless, as are the ratings, especially on a site actively promoting precious metals. I knew a bloke once who simply agreed with every DRA article and regularly scored constellations and whole galaxies! :)

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  5. You say it SO much more tactfully than me CA! :)

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  6. Funny ole world … Where’s Prozak? Nothin’ wrong with that lad 10 coons couldn’t sort out in 10 seconds down the local Abo pub … An’ then let him buy them all a drink afterwards to make up! :) Serious Prozak – You’re a budding honourary Aussie mate – Just waiting for a coupl’a ya edges to be smoothed! And I learn from ya comments an’ hopes ya pops up here again right soon! Gotta laugh …

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  7. Think I’ve finally figured out what I dislike so much about political correctness – It’s a deceit – As in show me two people who actively feel the need to be politically correct to each other and I’ll show you two people who at some level are just actively putting off the thought of throttling each other for now! (Not a bad thing; But hardly a solution.) And it’s a conceit – As in it lets pollies say See, they are all talking nicely to each other – No problems here mate!
    Next one nationalism – Got to admit that I strongly suspect a hardworking chinaman probably adds a bit more to my wellbeing than a long term Oz welfare recipient. And it wouldn’t break my heart if the chinaman got some of my tax money and the aussie didn’t. It would distress Kev though with the aussie being a voter of course.
    Remember talking to an American democrat late last year – Yep, in America some people get $200k pa and lots only get $20k pa – But Mr Obama will make it better – He’ll share the wealth around. To which I asked the question: On average Americans get $44k pa and Chinese get maybe $2k pa – There’s 1.3 billion of them – Tell me how exactly you see this “share the wealth around” thing working again?
    Difficult one – globalism versus nationalism. With national leaders having a fairly strong vested interest in nationalism. 2010’s food for thought.

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  8. The U.S. economy and nation as a whole has had a pretty good run but all good things come to an end and it is pretty clear that the U.S. is not the global leader as it once was. Even Japan is now reviewing the type of relationship it has with the U.S. and nothing highlights this more than the relocation of the marine base in Okinawa. I could go on, but I have ranted about this subject a year ago in: http://www.shareswatch.com.au/blog/opinion/the-us-auto-industry-bailout-and-some-inconvenient-truths/ so I don’t have much more to add.

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  9. Gotta admit it was comforting to them who didn’t like thinking too hard that the Yanks were the good guys and anyone who didn’t do what the good guys told them were the bad guys. But then it became apparent that the good guys were a bunch of money grubbing, free-loading thugs! :)

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  10. Its the human story aint it Ned…power corrupts and all that.
    Merry Christmas to ya Neddy!

    Lachlan Scanlan
    December 24, 2009
    Reply
  11. Ned sites like this aint politically correct. Obama would say of the blogosphere…it lacks “context” …or something like that and where “context” equals remoulding the facts into mindnumbing propaganda…IMO.

    Lachlan Scanlan
    December 24, 2009
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  12. Mr O is the quintessential pollie I think Lachlan – Not too many pigs that bloke couldn’t put lipstick on. Merry Chrissy to you and yours as well mate!

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  13. Hey Ned – Im a real aussie – I grew up in the desert and spent my youth in mining towns with big aboriginal populations. I am not some old bloke sitting around trying to entertain himself in suburbia.
    I hate the stereotypes on both sides of those arguments. Overall i prefer the “politcally correct” dipshits over the “not my problem – bloody aborigine spongers” dipshits. Both are just complaining whilst offering no practical solutions but at least the politically correct ones seem to be looking forward.
    Congrats mate – I was feeling happy and full of christmas cheer, how lucky I am to have my friends and family and a bit of money spare.
    Then read your post – “aww just fooling around – trying to get a rise – some of my best friends are aboriginals (is that how it goes?)” – now I just have a bad taste in my mouth.

    Reply
  14. I struggle to come to terms with the notion that the US consumer is finally, actually satiated, but I rub my eyes and see the reality. If the US consumer should cut his annual spend by a mere 5% (not infeasible), it equates to wiping out all US imports from five or six ‘tiger’ economies.
    Up till now, we could work on the good old assumption that the USA would go on consuming and the world’s manufacturers would go on making.
    Hope I’m wrong, but I have a feeling the world is heading for a fundamental readjustment. The “GFC” is at bay, but not banished or surmounted.
    These imbalances cannot be ‘fixed’ by simple government intervention.

    Reply

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