A Space Oddity
Since 1946, at least in the US, the skies got a little bluer every day. Consumer spending increased nearly every year. At first, consumers spent what they earned. And then came the wonder years…when they spent more and more money they hadn’t earned yet.
Then, in the 20 years leading up to 2007, incomes scarcely rose. But standards of living went up anyway. How was it possible? Easy. Instead of saving 8% of their incomes, as they had for the previous 5 decades, they spent the money. The savings rate fell to near zero. Debt increased. Of course, you can only take a thing like that so far. In this case, the end of the credit expansion came three years ago. All of a sudden consumers were faced with a grim prospect. They could no longer spend money they didn’t have. Now they had to NOT spend money they DID have. It was pay back time…time to return the money they had borrowed during those carefree years.
Settling up was so alarming and so disagreeable that the feds swung into action to prevent it. First came the monetary stimulus – with the Federal Reserve’s key rate reduced to zero…and the Fed empowered to buy $1.7 trillion worth of toxic loans from shaky lenders. Second, the federal government itself greatly increased its spending – adding $4.11 billion of deficit spending every single day since September 2007.
And now, US Treasury Secretary Larry Summers says the recovery has reached “escape velocity.” Whether or not he correctly judges the speed of the economy, we don’t know. But we’re sure he’s wrong about gravity.
According to the official stopwatch, 163,000 people found jobs in America last month. Forty-eight thousand of them were jobs with the US census bureau. Those jobs are temporary and useless. If you could create wealth by having people count one another, perhaps we could create even more wealth by having them count the stars in the heavens or the grains of sand on Malibu beach. Take off the counters and that leaves 114,000. Now take off the statistical adjustment for births/deaths, and the statistical adjustments for bad weather, and the statistical legerdemain that disappears people who are too discouraged to continue to look for work, and you have a negative number. The economy actually lost jobs in March. According to John Williams, who keeps track of the figures, joblessness rose in March to 21.7% – just a tad lower than the worst figure from the Great Depression.
Now, we turn to savings rates. Some analysts say savings are on the rise – showing consumers’ ‘pent up’ buying power for the future. Other analysts note a recent downturn in the savings rate. That, they say, shows consumers’ willingness to spend now. Both are wrong.
It will be a cold day in Hell when Americans are not willing to spend. What is at issue is not the spirit but the flesh. The Baby Boomers were flying high during the wonder years. They looked forward to higher house prices and rising stock prices. But now, after having suffered an $11 trillion loss in stocks and real estate, what can they do? Gravity is pulling them back down to earth. Like it or not, they have retirement to think about. That’s why they have not participated in this stock market rally; inflows into mutual funds are running at only a quarter of their ’90s rate. The boomers know they can’t trust their retirement to the stock market. They’ve got to spend less.
Nor does a rising savings rate mean what analysts think it means. Savings are not simply ‘pent up’ spending for the future, not following a 63-year-old credit expansion; the money was spent years ago. Bankruptcy filings hit a record in March – at 6,900 per day. This debt elimination is registered as an increase in “savings.” But it’s not the kind of savings that you can spend at the liquor store.
Meanwhile, Alan Greenspan says rising bond yields are “the canary in the coal mine.” This week, the canary was still alive…but wheezing…with yields on the 10-year note over 4%. Why? Probably, it is because the Fed is no longer, indirectly, buying US Treasury debt. Until last week, the Fed bought the banks’ bad mortgage-backed securities. The banks returned the favor. Rather than lend to the private sector, they bought US notes and bonds.
In the private sector, bank credit is still contracting, with commercial and industrial loans falling at a 17% rate over the last 3 months. Revolving credit – auto loans and credit cards mostly – is down for the first time ever. The money supply is contracting too. M2 is declining at a 0.2% rate and MZM going down at a 5.4% speed. Consumer prices are still dropping in the US. In Europe, too, inflation is at record low levels – 1.5% annually. And Goldman Sachs economists predict further drops in the CPI – to 0.3% in the US and 0.2% in Europe.
Escape velocity? Looks more like stall speed to us.