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Consumer Spending Returns to Old Deficit Habits

Not all the news was Greek.

The U.S. consumer spending report this week showed that consumer spending is up even though consumer confidence is at its lowest point in two and a half years. GDP supposedly returned to pre-recession levels, too. That came with the caveat from Paul Ashworth, an economist at Capital Economics, that the rise was for completely temporary reasons that will give way in the fourth quarter. “We still expect growth to slow again over the next couple of quarters and, while our baseline forecast does not include an outright contraction, we expect GDP growth to average a lacklustre 1.5% in 2012.” Regardless, the report says consumer spending grew 0.6% last month over the month before. That bit of “good news,” following the Greek Solution, kept the stock market on a high.

But is more consumer spending truly good news?

I put the “good news” in quotes because it is only good if you’re an advocate of greater debt and failed economic principles. The stock martket rose in denial of darker information that was also among those statistics: while consumer spending trends went up 0.6%, personal income rose only 0.1% last month. Consumer spending power actually dropped once inflation is factored in, yet spending rose six times faster than income during the past month. Looking year-on-year for the broader trend, consumption has risen at an annualized rate of 2.4%, yet personal disposable income has fallen 1.7%. That means the gap (deficit) between what consumers are spending and their income has broadened by 4.1%.

Fundamentally, this increase in consumer deficit spending means we’re heading down the wrong track AGAIN. If the rise in consumer spending were because incomes had improved, it would be different. Rather, consumers are returning to deficit spending economics by buying things on their credit cards or depleting their limited savings, which had been on the mend after years of the lowest savings on record. That conclusion is born out by this same report, which shows that individual savings fell 1% over the past year. It appears unlikely that a 1% reduction in individual savings would have made up all of that gap between falling income and spending on the rise, so the rest must have been a re-expansion of consumer debt.

Old consumer spending habits die hard

That means we’re already returning to the old spending behavior that created this recession. It is as if nothing has been learned over the last thirty years. It’s more like consumers have said, “Well, we’ve weathered through long enough, so now we can return to our old ways.” That’s just what the doctor ordered, but the doctor is a quack. Both the Bush and Obama administrations have done everything possible to encourage consumers to take out more debt in order to resume spending. The government has lured banks to give more low-interest loans in order to entice consumers to take those loans in order to ramp up the old economy that was built on deficit spending. It is, as I’ve been writing for years, easy to let the good times roll when no one is actually paying for them.

It’s the same old song over and over by people who don’t want to hear the music. They refuse to recognize that debt spending as the path for “economic growth” has reached its logical end. For thirty years I’ve written that our economy was not on a sustainable path, having predicted thirty years ago that the path would reach its end in about twenty-five years. It took only slightly longer than I thought to reach that limit because government has more ability to create debt and create money out of thin air than I gave it credit for; but we are there. Extending the deficit economy any further only makes the eventual correction that much worse by lessening our ability to soften the landing.

Both Republicans and Democrats completely lack the vision and the cooperation to create a sustainable economy built on solid fundamentals. The real deficit here is in ideas. Republicans took a surplus economy — the first in decades – that they inherited from Clinton and turned it into a deficit economy that went bankrupt while Bush was in charge. The second the Bush tax cuts went into effect, the economy went back to deficit spending and never recovered. Their ideas have expired like their tax breaks ought to. They also consistently led the charge for the bank deregulation that made this crisis possible. Under older regulations, this could not have happened. Still, they believe in their expired with near religious zeal.

Obama, the man of change, on the other hand, hasn’t changed a thing. He continued the mega bailouts the Bush administration began because he had no better ideas. No original thought. He also had no better people. He kept and/or put the people who had helped engineer the economic crisis in charge of figuring out a recovery. As a result we have no recovery. The man of change has given us two-and-half years of the same old thing, except that more people are unemployed, and their money doesn’t go as far. His administration has resulted in an opportunity lost to re-invent the nation’s economy.

Last-Minute Outlook for Economic Recovery

As I put the finishing touches on this article that I wrote over the weekend, news on the stock market turns around on Monday morning: Bloomberg Businessweek reports, “Stocks retreated from an almost three-month high as Italian and Spanish bonds fell amid concern European leaders will struggle to raise funds to contain the region’s debt crisis.” You see, rise in the market predicts nothing other than room for another fall.

“The MSCI All-Country World Index lost 2 percent at 11:51 a.m. New York time.” The good news doesn’t last long these days. It was only Thursday that an article on CNBC by Reuters proclaimed, “a suddenly revitalized U.S. economy that a few weeks ago was teetering on the verge of recession and had fueled speculation about another round of quantitative easing. Almost overnight it leaves a whole new global outlook that appears a little more encouraging.

A suddenly revitalized U.S. economy that looks encouraging, huh? Last week’s market surge and positive economic news only leaves such a rose-tinted outlook if one denies how little has been done to right the fundamentals that are missing in our economic structure. For one who focuses on the the economic principles at play, rather than the meaningless daily bounces of the New York Stock Exchange, there is no overnight improvement in the global outlook.

Nevertheless, it looks like I could miss my prediction that there would be a second market plunge in October following the August crash. Just the opposite happened. I was right when I predicted the August event, but my opinion that problems in Europe would pile on faster than their ability to do something about them has been put aside for the moment. I think, however, it is still such a fragile situation that it could fall apart at any moment.

An example of the fragile nature of the Greek Solution by Europe also comes in the Bloomberg article quoted above, “Stocks declined, led by banks, following the biggest weekly gain since 2009 after China’s official news agency Xinhua said the country can’t play the role of “savior” for Europe…. ‘“Some of that rally that we’ve seen were on comments that China would provide support to Europe,’ Mark Bronzo, who helps manage $23 billion at Security Global Investors in Irvington, New York, said.”

So, there could be an October Surprise yet … that started this very last day of October. Still, if one trumpets his successes, he should also admit his misses, and a downturn on the last day of October is not a plunge unless it develops into something much worse. This blog, after all, is about clarity, truth, and breaking through economic denial. This could turn out to be my first miss so far. If so, it should be noted.

 

Further reading on consumer economics and sustainable economics:

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