海角大神

Consumers won't save the US economy

The US is waiting for a consumer-driven economic recovery, but it isn't likely to come. Consumers don't have jobs or credit, and they're in no position to borrow.

The Great Correction intensifies鈥�

The Dow rose on Friday. The dollar fell. Gold is back over $1,400. And the euro 鈥� the world鈥檚 most despised currency 鈥� is back over $1.40.

A chart circulates, supposedly proving that GDP is now back to where it was in 鈥�07, after falling only 4% in the downturn.

We don鈥檛 believe it; they鈥檝e juked and jived the figures.

None of the key components of US GDP have recovered. Housing starts, for example, are running at a million less than they were before the crisis began. Employment is back to the levels it was at 10 years ago 鈥� with 7 million fewer jobs than in 2007! Retail sales are going up 鈥� but they are still not at the level they were in 鈥�06 or 鈥�07.

So how could the overall economy recover, while the most important parts of it do not?

The real answer: the economy hasn鈥檛 recovered. And the Great Correction hasn鈥檛 gone away. Instead, the correction is like a hurricane sitting just off the coast. It took a swipe at land, and now, it鈥檚 back out at sea; its winds are picking up speed. It鈥檚 getting larger鈥�stronger鈥� It鈥檚 intensifying.

Why?

As we鈥檝e said too many times, none of the problems that led to the crisis of 鈥�07-鈥�09 were corrected. Instead, they were twisted into awful new shapes. They鈥檙e still there 鈥� swirling around, worse than ever.

Approximately 73% of the economy comes from consumer shopping. So, in order for the economy to grow, consumers have to be able to shop, right? But how can they?

Properly adjusted for inflation, the average wage is lower today than it was in 1973. That鈥檚 right, almost 40 years of going nowhere.

Well, hold on鈥�we know what you鈥檙e thinking: 鈥淲hat are you talking about? There were some great years for the US economy between 鈥�73 and 鈥�07.鈥�

And you鈥檙e right. But they didn鈥檛 come from solid, real growth in consumer purchasing power. Instead, they came from two sources:

First, consumers borrowed more. Total debt went from about 150% of GDP to over 370%. The financial industry went wild, sending our credit cards to dogs and dead people鈥�lending money to people without jobs or income鈥�writing mortgage contracts with built-in fuses.

This was not healthy growth. It was not sustainable. It just took 鈥済rowth鈥� from the future and moved it forward. Want to know why the housing industry builds so few houses today? Easy. It already built today鈥檚 houses yesterday. Why is a credit-fueled boom not sustainable? It鈥檚 because credit markets go up and down, just like all other markets. When credit is cheaper, people borrow more and buy more. When credit becomes more expensive, they have to pay down their loans and stop buying so much.

Second, during the period 鈥�74 to 鈥�07 more people worked longer hours. The whole family went to work; not just the head of the household. And they worked more hours. This was proclaimed as a great era for women. They went to college. They got jobs. And they had families too. Now, they no longer supplement their husband鈥檚 salary. They鈥檝e become equal partners in the household鈥�often, senior partners. The lucky ladies; they get to work two jobs now 鈥� one at the office and another one at home!

Up until 2007, the feds could counteract every attempted correction by making more credit available at lower prices. But by 2006, the credit machine no longer worked. The private sector economy was saturated with debt. It couldn鈥檛 take any more.

Only the feds could still borrow freely 鈥� which they did. In 鈥�09 and 鈥�10, the US government borrowed ALL America鈥檚 savings 鈥� and then some. Since November of 鈥�10, the Fed has simply been printing money 鈥� enough to cover 109% of the government鈥檚 borrowing needs during that period.

For the most part, households still can鈥檛 borrow鈥�and don鈥檛 want to. Unless they are borrowing from the government. All the recent increase in consumer credit, for example, can be explained by the increase in student loans.

Consumers are in no position to borrow鈥�and no position to drive a real recovery. They鈥檙e still nailing up plywood over the windows and moving the furniture to the second floor. They don鈥檛 have jobs. They don鈥檛 have credit. And their houses 鈥� which they might have borrowed against 鈥� are still sinking below the waterline.

Oh yes, the next big surge of ARM resets, recasts and defaults begins next month.

Pity the poor lumpenconsumer. He was in such a hurry to consume in the bubble years. Now he can鈥檛 consume at all. His income is stagnant. His net worth is falling.

And if that weren鈥檛 bad enough. The poor consumer鈥檚 costs are rising.

Take a look at this report from CNBC:

Cost of Living Hits Record, Passing Pre-Crisis High

One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while 鈥�

A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.

The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed鈥檚 preferred measure, CPI excluding food and energy, increased by just 0.2 percent.

Bottom line: The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.

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