What’s this? Has the U.S. consumer, the primary engine of economic growth, become ambivalent? This is what the latest data says…
According to the Thomas Reuters/University of Michigan’s early July index reading, consumer sentiment is 81.3. This is below the 83 level that the experts predicted and below the June mark of 82.5. Yet while consumer sentiment is lower, it generally didn’t change. What to make of it.
“The most remarkable aspect of recent trends in consumer confidence has been its resistance to change in either direction due to very negative GDP nor very positive employment gains,” survey director Richard Curtin said in a statement. “This stability will provide the necessary strength for consumer spending to continue to expand, but does not support an acceleration in spending above 2.5 percent.”
Remember, consumer spending accounts for 70 percent of the economy. If you take the numbers at face value, the more consumers spend the more the economy grows. However, this doesn’t tell the whole story.
You see, because much of consumer spending is on the back of an abundance of cheap credit…increases in consumer spending actually represent increases in the rate people are going broke. Modern day monetary policy seems to have missed this simple point.
An Unstable Sediment of Debt
The captains manning the monetary controls at the Fed see a drop in consumer sentiment and they panic. As they see it, if people reduce their spending demand will fall, which reduces production and prices. This can lead to a deflationary depression.
Certainly, connecting these dots is logical. However, the Fed’s desire to prevent deflation and their attempts to do so are dangerous and misguided. What’s more, while they postpone an economic contraction, they ultimately put the economy at risk of a much larger and much more disruptive future bust.
The Keynesians at the Fed believe they must give the world an abundance of cheap money. They believe they must cheapen the price of money because their guiding Keynesian theory tells them more money will result in more spending, which will create more demand and solve everything. More spending, they say, will result in an economic boom, resulting in more jobs…and, before you know it, everyone will grow rich together.
It doesn’t matter that QE, QE2, Operation Twist, QE3 have produced the most lethargic economic recovery in the modern era. The Fed’s gone all in. They’ll keep implementing cheap credit and demand stimulating policies until they ruin us.
The demand the Fed is dedicated to create is not real demand. It’s an illusion of demand founded on an unstable sediment of debt. But that’s not the half of it…
Slip Back Economics
Entire industries have been developed to support this false demand. Colleges and Universities wouldn’t at all resemble their current bloat without the massive wave of student loan debt. Auto sales would be a fraction of what they are without the easy auto lending standards.
In fact, if you hadn’t heard, there’s a looming subprime crisis in auto loans. Over the weekend we learned about a one Rodney Durham. Mr. Durham stopped working nearly 25-years ago, declared bankruptcy and lives on Social Security. Yet, somehow, Wells Fargo lent him $15,197 for a Mitsubishi that was repossessed shortly after.
The point is, the cheap money policies to rev up demand lead to disaster. The student loan crisis and the looming auto loan bust will be extraordinarily disruptive to the economy and people’s lives. In addition, while these are easily observable distortions, there are countless others out there that will wash through the economy like a series of tidal waves.
These are the same policies that have made it near impossible for a median income to support a middleclass lifestyle. What’s more these are the same policies that have pushed the nation into debt servitude. In exchange there’s a boost to GDP and a decline in the unemployment rate.
Unfortunately, these manufactured improvements to the economic numbers don’t represent a healthy robust economy. Instead, because they are produced by a false debt driven demand, they represent an economy that’s running on overdrive yet slipping back. For many people, this sort of economy becomes more unbearable each day.
for Economic Prism