Misconceptions About the Consumer's Role in a US Recovery

Have you been following the news, dear reader? Food prices are hitting record highs. Riots have broken out in Africa. Already, two governments have been toppled…in Tunisia alone.

Nature seems to be giving us a warning. The thermometer in England hit a 100-year low in December. Airports were blocked by snow all across Europe. Florida, too, shivered in temperatures that hadn’t been seen in generations.

Floods in Australia were worse than any since the time of Noah. An area the size of France was said to be submerged. For a while, it looked like the whole continent might disappear beneath the water.

And then…in America…birds fell from the skies. Whole flocks of them. In Europe too. Thousands of them. And little fishes beached themselves and died.

Surely these are omens. The Second Coming is at hand!

Or maybe not. Even the first coming was largely ignored until hundreds of years later. At the time, only a handful of people knew or cared that Jesus had been crucified. It was only much later that it became a big deal. That’s the problem with history…it’s very hard to see what’s going on when you’re in the middle of it.

Still…you gotta guess…

A study of tree rings tells us that periods of cold, drought and famine have often been accompanied by revolutions and war. People get hungry. Then they get mad. Then they get to work…attacking the system, whatever it is.

Mass man is not a thinker. He is a reactor. He reacts to the weather…to prices…to the economy…to demagogues…and even to ideas. He accepted the system of modern social welfare economies because he was comfortable. But what will he do when the system is unable to make good on its promises? Our guess is that “the system” in the advanced countries is approaching its final stage… Why? It just can’t pay.

We like to read Francis Fukayama. Not because he is right about things, but because he is wrong in a big way…

But so is just about everyone. Most economists see the financial problem in America as a typical recession caused by a lack of demand. If they could just figure out how to stimulate the consumer…everything would be okay.

And most commentators see the political problem in simpleton’s terms too. Like Krugman, they think the democrats are right and the republicans are wrong. Or like Boehner, they think the republicans are right and the democrats are wrong. And then, there are those who think that if the two major parties could just get together…they could sort things out.

Uh uh.

The real problem in Washington and the economy is deeper…it won’t be fixed by bipartisan cooperation – because both parties are wrong. They have to be wrong. They have to respond to the marginal voter, who is a lunkhead.

Nor will the economy recover by inducing the consumer to shop. American consumers already spend too much. They have a savings rate of just 5%…far too low to finance the kind of capital improvements the nation needs. Consumer demand needs to go down, not up.

But getting back to Fukayama, this is the man who – in the dizzy days following the fall of the Berlin Wall – lost his balance completely. He wondered whether we had reached the “end of history.” The idea was that history was the march of progress and that after the triumph of American capitalist democracy no more progress could be made.

The idea was silly…but in a grand kind of way. Besides, the neo-cons loved it. It flattered them and vanity got the best of them. They figured they were the crown of creation; with their arrival on the political scene time could jolly well stop. Perfection had been attained.

That was then. In the here and now, Dick Cheney should be afraid to travel outside the US (for fear he will be arrested for war crimes)…and Francis Fukayama is having second thoughts.

The problem now, he says, is that the system in America has “ensured individual liberty and a vibrant private sector, but it has now become polarized and ideologically rigid. At present it shows little appetite for dealing with the long-term fiscal challenges the US faces.”

Little appetite? As near as we can tell, the politicos are on a hunger strike. There’s no way they’re going to take up the greasy issue of US finances.

Cut the fat? John Boehner just proposed that the feds roll back spending to the levels of 2008. What? He’ll have to do a lot better than that. Federal spending was way out of line in 2008…and it had been out of line for many, many years. Here’s a report from the Independent Institute:

Runaway Federal Spending the Reality for Nearly a Decade

From 1976 through 2001, Uncle Sam could have secured and maintained a balanced budget by cutting federal spending by $570.75 per household per year, according to Craig Eyermann, creator of the online Government Cost Calculator at MyGovCost.org. After 2001, however, government spending grew faster than median household income, and the deficit soared. By 2009, the feds would have had to slash spending by $8,991 per household to close the gap.

House Speaker John Boehner proposed reducing a significant part of federal spending to 2008 levels. That measure may sound bold, but it would be totally inadequate. “That’s like a sedentary senior reducing his daily calorie intake from 5,500 to 4,500; it’s still way too much,” writes Emily Skarbek, director of MyGovCost.org. Policymakers who call for raising the debt ceiling – as has been done 70 times since World War I – are deluded if they believe doing so would result in a substantive improvement.

“Like all gluttons struggling to reform, politicians and presidential advisers will provide plenty of excuses for increasing the debt limit – just this once,” Skarbek writes in The Sacramento Bee. “But if 70 previous increases weren’t enough, why will this increase be different?”

Hey… Wasn’t George W. Bush in charge the whole time, from 2001 to 2008? Wasn’t he a republican? Couldn’t he have simply vetoed these spending bills?

It was the biggest spending spree in US history. How many spending measures did George W. Bush veto? None that we remember.

No amount of bi-partisan cooperation is going to really fix America’s financial situation. Because both parties believe in the same model – spend, spend, spend…elect, elect, elect. It’s the model of the 20th century social welfare state. The government promises to give voters more than they pay for. The voters pledge to keep toiling in massa’s fields and vineyards, paying their mortgages and their taxes. And if called up, they’re ready to sacrifice their lives to keep the system in business.

(If asked, the typical US soldier will tell you that he risks his life to protect his family and his home. But the only war in which his home and his family were really under attack was the one launched by the US government against the southern states. It wasn’t Kaiser Wilhelm or Emperor Hirohito who burned Atlanta. It was Abraham Lincoln.)

More to come…

Bill Bonner
for The Daily Reckoning