Thrift Spoils Everything in a Consumer Economy

“Those damned consumers and their whiny confidence readings!” the Feds must be cursing. Sentiment dropped to its lowest in three months, according to the Reuters/University of Michigan preliminary index. Apparently the consumers aren’t reading the papers. Don’t they know a recovery is underway?

After all, the S&P finished up for a second straight week, higher by around 2.5% since Monday’s open. The markets are 60% above the 12-year low set back in March, and within a whisper of recouping half the losses since they fell from their 2007 records.

“What’s not to be confident about?” the Feds wonder – incredulous that foreclosed families are not whistling the same recovery tune. They point out that the banks are back to lavishing record-level bonuses on their top brass…trading desks are wheeling and dealing again…everything under the sun is worth more (in dollar terms) than it was a few months ago…AND, unemployment is still a few percent lower than Estonia’s record high…

And yet, despite all this “good” news, those consumers are trying to pay down their debt. Why, they’re just spoiling the party! We can almost hear those disgruntled DC goons now…

“Just because those ungrateful saps don’t have jobs, doesn’t mean they shouldn’t be pulling their weight to aid the recovery. Why aren’t they out there buying more stuff from the department stores? Don’t they know we’re broke? This is the time to spend, spend, spend! And don’t give me that ‘tapped out credit line’ hogwash either. Why, look at our national credit card. It’s in a despicable state…but has that stopped us from doing our bit to spend our way out of trouble? I should think not!”

If only our unemployed brothers and sisters read the paper they would know that true economic recovery – the sustainable, nation inspiring kind – only comes from plasma television lay-aways and gratuitous Visa purchases at the individual level. Well, at least that’s what their government expects of them.

But the individual is not like his government. He cannot, for example, amass exorbitant debts to his neighbor and then simply print off the money in his basement to repay them. If the Feds catch him in the act, he is charged with counterfeiting and sent to the slammer. The Feds don’t like competition, you see, and currency debasement is their racket. To them, the smell of freshly-inked bills is an anodyne for the inconvenient pains of real world economics.

But such naïve thinking is truly dangerous, and dangerously untrue. It leads arrogant politicians to think that “deficits don’t matter,” as one ineloquent politician infamously remarked.

Take, for example, just one of the mounting debt problems facing the United States: the trade deficit. According to figures released Friday by the Commerce Department, that deficit – which measures the difference between US imports and exports – jumped 18.2% in September, the largest margin in a decade, to $36.5 billion. The shortfall to China alone jumped 9.2% to $22.1 billion for the month, the highest imbalance in almost a year. No prizes for guessing which country owns the most US debt overall…

But that’s okay, the Feds say. We’ll just auction off more bills to finance it. This week alone, The US Treasury auctioned off $81 billion in new debt ($40 billion in three-year notes on Monday, $25 billion 10-year notes and $16 billion in 30-year bonds). By any measure you care to use, that is a large number.

Sure, its lunacy…but that usually only guarantees that it’s also policy. Dan Denning had a great piece during the week about US sovereign debt with a rather foreboding chart you might want to check out. Long story short: Debt eventually comes due. And, if you haven’t treated your creditors with respect, they might not be so willing to continuously finance your shopping sprees.

That the citizens of Bailout Nation express some trepidation about their financial future is no surprise. In fact, given the spendthrift nature of their government, any skepticism must be viewed in a complimentary light. Contrary to popular political opinion, Chinese people don’t make the world’s toys for free. One day, perhaps very soon, those workers are going to start demanding what they’re owed.

So yes…we’d be worried too.

The Daily Reckoning