Bill Bonner

Here’s a chart sent to us by colleague Justice Litle:


Interesting huh? Consumer credit has fallen off a cliff.

What does that mean exactly? It means Americans aren’t borrowing…and they aren’t buying either.

This weekend, The New York Times noticed:

“Americans stop buying; trade deficit declines” begins the headline.

This is the story we’ve been telling here at The Daily Reckoning for two years. Americans have to cut back. They are out of time and out of money. Ten years closer to retirement than they were in before the tech stock crash, Baby Boomers are not a penny richer. Now, they’re facing a funky economy where housing prices are in decline, jobs are hard to find and lenders are reticent to lend them more money. Daddy has finally taken the T-bird away.

But wait…if the Baby Boomers stop spending won’t it have, like, repercussions?

The NYT continues:

“For the first eight months of the year, the United States trade deficit with China is down by about 14 percent or $20 billion, compared with one year ago. The nation’s trade deficit with Japan has shrunk by almost 20 percent, and its deficits with Mexico, Canada and the European Union are down more than 40 percent.

“The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal.”

Americans were the world’s champion consumers. Just lend them money; they’d spend it. But when they stop spending it brings a hush to the entire planet. The malls go quiet…trucks slow down…ships are idled…and finally factories are shut down. Clerks, drivers, stevedores and assembly line workers all go home. That is what a depression is all about.

The feds are trying to get consumers to spend again. They’ve given them tax rebates, incentives, loans, and bribes. They’ve run a federal deficit three times higher than the previous record. They promise $1 trillion deficits “as far as the eye can see.” And they put at risk a sum of money equal almost to the entire US GDP.

Still those hardheaded consumers won’t consume like they’re supposed to.

Suddenly, it’s the ‘Age of Thrift.’

But if it’s really the age of thrift, the stock market doesn’t seem to have gotten the message. The Dow rose 78 points on Friday, to a new post-crash high. Oil held at over $72. And gold lost $7 to close at $1,049.

What are stock market investors thinking? Are they thinking at all?

If the consumer credit party is over…and the Baby Boomers are on the wagon…is it really possible for US businesses to grow…and prosper?

Yes, it is. America has great businesses with great brands. As the dollar falls it should be able for them to gain global market share in some sectors. But 70% of the economy is consumer spending. Until that changes, the US economy is hostage to US consumer spending. When consumers stop consuming, the US economy’s wheels stop turning.

Okay, so you’re thinking: “Well…maybe Americans have to cut back, but there are plenty of other people in the world. Let them do the buying for a while!”

And you are right. America has less than 5% of the world’s population. But it consumes more than 20% of the total world’s output – as measured by GDP. Clearly, Americans have been doing more than their fair share. It’s time to let the foreigners belly up to the bar. Heck, they’re skinny. They could use a good drink.

In time, foreigners will spend more. We don’t doubt it. But rebalancing the world’s economies won’t happen overnight. Nor even in a couple years. It will take a long, long time. And a lot of investment in new tools, new training, and new techniques. Until that happens, when US consumers stop buying it slows wheels all over the world.

Every time finance ministers and heads of state get together they talk about “rebalancing” the world economy. They promise to take steps to make it happen. But so far, the market is doing all the rebalancing work on its own.

And instead of letting nature take her course…allowing the invisible hand of capitalism to direct capital to where it is actually needed…the heavy hand of government blocks the process of correction.

Credit is still contracting. And Reuters reports that “small US firms face credit squeeze.”

In theory, a genuine recovery in the United States could be led by exports. A cheaper dollar…and a cheaper workforce (in global terms)…would make the United States a better competitor.

But even a cheaper dollar is not guaranteed. Consumers may have stopped borrowing, but the US government borrows more than ever. This borrowing – in dollars – increases demand for greenbacks and may actually sustain the dollar at a higher level than it should be. The feds’ appetite for borrowing could also force up interest rates – further restricting small businesses’ access to easy credit.

There is a big difference between selling a few more Harley Davidsons overseas and real export-led economic growth for the US economy. The latter would require hundreds…thousands…of Harley Davidson enterprises, selling billions worth of goods and services to foreigners. And right now, those enterprises don’t exist. They have no lobbyists trying to get TARP funds. They have no pet Congressmen slipping tax breaks for them into defense bills. They have no unions backing them. How could they; they haven’t even gotten off the ground yet. And they may never get off the ground if they can’t get financing.

The boomers are saving. They put their money into the safest possible place – US bonds! That is, they lend it to the government. They’re the feds’ biggest single source of financing – even bigger than the Chinese.

Meanwhile, the feds pump billions into the banking system. They supply the banks with capital for expansion and consumption. But instead of making loans to the private sector, the banks take the feds’ money and lend it right back to them. They can borrow at a negligible rate…and then use the money to buy long-dated T-bonds yielding over 4%. Result: banks make money; the private sector has no money to create new businesses.

This weekend, we had a conversation with an English carpenter.

“It’s rough. I remember just a couple of years ago, I could get work anywhere. Now it’s off and on. I still find work, but I have a lot of free time too.

“It’s not easy. Not with four children. We don’t have any choice. We don’t get any public benefits, you know…because I’m working. But I’m not working as much as I used to. And I’m not getting paid as much. So what can we do? We have to tighten our belts. We get by. But we’re definitely not spending money they way we used to. In fact, I wish we hadn’t spent so much back then. I’d like to have some of that money now.”

A report in the Telegraph predicts British property prices – which have been in an upward trend for several months – are headed down again…with a 17% decline expected.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Bors

    I just want to live in a country where the government actually likes its citizens and the currency is worth today what it was worth yesterday.

  • Larry

    I do not expect the stock market to face a big correction with the FED holding interest rates at 0%. With savings accounts paying negative real interest rates everyone is forced to speculate.

    I expect the big drop to come once the FED taps on the brakes.

    I have been reading your column here with interest but I think if the USA government wants to become Zimbabwe they are perfectly capable of at least doing that right.

  • Shawn Allen

    Bill, A Question about U.S. Debt per chart above.

    THe GAAP debt is owed to Americans right? Comment on the implications of debt owed to citizens verus foreign.

    Of the cash debt “only” $3.384 trillion is owed to foreigners. Ids it not the foreign debt that is the real concern. Debt owed to citizens can be taxed back?

    Much of the $11.5 trillion is owed to various U.S governments?

    Bill, I look for your posts daily…

    P.S. I am reading New Empire of Debt. Extremely informative, thought provokong and entertaining. (Bill by this comment you will, I am sure, realise what a smart guy I am)


    Bill I met your son Will back in 2006 at the Delray Beach Boot Camp. He was so polite and also handsome and seemed very smart. (Bill by now I am sure you are convinced of my genius and my excellent judgement of people.)

  • Lost & Found

    It is a strange blog here. Highly critical comments won’t make it.

  • Lost & Found

    If you brag about having been right you should confess about having been wrong, too. When you recommended gold miners as the best bet ever they went down, down and down as never before. And this is only one example where you have been dead wrong. I also noticed that at times in certain Agora publications you are talking gold down while at the same time you are talking it up in others. Talk about credibility here. And no, I have never been buying gold miners and I am not a follower of W.B. either.

  • JMR bayou bobby

    It’s good to be the king, until it isn’t.

    More on auto braking metaphor: Since we’re skidding along on a solid and seemingly endless sheet of black ice, one or two taps on the brake will send the coach careening. Or not, if the driver is skilled, alert, and capable of responding quickly.

  • sierra

    Total optimism/pessimism is a “ship of fools.”
    Somewhere in between lies the “ship of wisdom.”
    BB describing those who were maybe on the cusp of retiring in 2000 are now deep in the hole (ten years later) because most of that horrendous loss has not been made up and never will.
    Suffering the double whammy of the 2000, and the natural inclination to stick with the markets (stocks etc.) to make up the losses the crash of ’07-’08 should make a believer out of you.
    I’ll say it again, this market is only for “traders” and not for the common folk.
    Keep writing BB.

  • Zev Paiss

    How about we start focusing on what a post-consumer economy could look like? With the eventual constraints of resource depleation we are going to be forced to rethink how to live well without consuming till the cows come home.

  • phelps who cant swim

    Bonner sums things up nicely. Some of the best financial advice I’ve every received from anyone came from Bonner and Rajiva’s book, Mobs, Messiahs and Markets. Bonner advised that if you wanted more money then spend less. I’ve taken that advice and although my income is shrinking I have more money. I’ve had the same feeling the English carpenter had in that I wish I had saved more money when the good times were rolling. To quote a Merle Haggard song, “are the good times really over for good”. Seems like the government is “rolling down hill like a snowball headed for hell.”

  • Bloomer

    “In theory, a genuine recovery in the United States could be led by exports. A cheaper dollar…and a cheaper workforce (in global terms)…would make the United States a better competitor.” So is this why the U.S. government fiddles as the dollars burns?

  • dizzyfingers

    Perhaps when the corrupt pigs in D.C. are gone, spending and credit will resume. But I believe until the corrupt pigs are gone, folks will continued to keep their pockets and their pocketbooks buttoned… and why would they not?

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