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
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
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
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
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
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
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.
The Daily Reckoning