Consumer Spending and the Decline of the US Economy

First, a brief look at the markets…

Stocks rallied a bit yesterday, reversing a sharp selloff from the previous day. The Dow added 65 points. The S&P 500 ended up a smidge and the NASDAQ finished 40 points ahead of where it began the session. Gold fell off by almost $25…before recouping all of its losses to end the day more or less where it began, at $1,506 per ounce. Silver trended likewise. As did oil.

All in all, it was a relatively underwhelming day to be watching the markets. Unless you enjoy watching paint dry, or grass grow. Events are unfolding slowly, with sudden, largely unpredictable bouts of “quickly.” The sailing is smooth, in other words…until it suddenly isn’t.

As far as we can tell, it’s near impossible to time these single day, multi-hundred point rallies and selloffs…which is why we long ago gave up trying. Instead, we sit back, take a deep breath, and remain as detached as practically possible from the minute-by-minute minutiae spewing forth from the world’s mainstream media outlets. We try to get a big picture view of what’s happening, something that helps us sleep at night. Then we have a nip of scotch or a glass of wine and go to bed. Easy.

So what is this “Big Picture” then? Fellow Reckoner, we’re shocked you have to ask! Bill has been outlining his Great Correction thesis for some time. We thought you’d have it down pat by now. Just to recap…

The developed markets of the world are unwinding – sometimes slowly, sometimes not – a generation-long credit buildup. Since roughly the end of the Second World War, Americans and Europeans have been on a rabid spending binge. At the beginning, credit expanded more or less in step with growth in productive capacity. The troops, returning from their various missions and adventures abroad, flooded the workforce with productive labor. Factories that had been put to use manufacturing things to blow other things up, returned to building useful stuff…things like automobiles, sink pipes and umbrellas. Production of these items responded largely to the demand for them…as well it should.

Slowly, almost imperceptibly at first, things began to change. The story of General Motors parallels the overall tale of the American economy rather well.

Back in 1954 GM’s share of the American market, then the largest auto market in the world, stood at a whopping 54%. The Detroit giant churned out one in every two cars made. The term “rust belt cities” had not yet been invented and places like Pittsburgh, Detroit and Baltimore were humming along to the sounds of metal presses and hammer on anvil. Through the ’60s and early ’70s, GM continued to cruise along. In 1961 she sold more than half of all the cars AND trucks in the US. Then, with the introduction of the GTO Pontiac Tempest in 1964, Detroit’s darling set about ushering in the era of the muscle car. But then something happened: the energy crisis. All of a sudden people didn’t want a V8 engine in a medium sized American body; they wanted a four-cylinder engine in a small-sized Japanese body. GM failed to adapt to the changing conditions of the market…as did the American economy at large.

Manufacturing began moving offshore as cheaper labor costs drove a competitive wedge between the new Asian producers and the aging, union-saddled companies in the US. A continuation of that shift through the ’80s saw GM’s market share in the US drop from 45% to 35% and, for the first time in 59 years, the company actually reported a net loss.

More union-led entitlement shenanigans throughout the ’90s and early ’00s, coupled with an almost unwavering commitment to inflexibility on GM’s part, eventually drove what was once the largest company on the planet into the arms of the US government. A sign of the times, indeed.

Today, China is the world’s largest market for automobiles and GM is an embarrassing shadow of its former self. And, as “Jap Junk” and “Korean Krap” outpaced manufacturing efforts at home, the United States itself turned from a nation of producers to a nation of consumers. When Deng Xiaoping was telling the Chinese masses that “to get rich is glorious,” Americans – and their Europeans cousins – were beginning to spend more than they earned, relying on debt to finance their increasingly extravagant lifestyles rather than savings and productive capital formation.

The whole process accelerated with EZ money policies under Chairman Greenspan and “the Bernank” and, by the time the Great Recession of ’07-’08 rolled around, the Americans were neck deep in a debt hole with nothing but a Chinese-made shovel with which to dig themselves “out.”

And still they dig…

As we mentioned in these pages earlier in the week, so deep is the current debt hole in the US that even if the IRS could somehow manage to double its income tax receipts, the federal government would still operate in the red. And that’s to say nothing of the economically stultifying effect such an onerous tax burden would have on the economy in general.

Today, money and power shift from the west to the east. That’s the mega-trend playing out under our nose; the direction the capital is flowing. Slowly but surely, the emerging markets of the world are becoming more and more business friendly. The west, meanwhile, is clamping down with more restrictions, tighter regulations and the heavy hand of government on every budding businessman’s shoulder…and wrapped around his throat.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning