Why Consumer Confidence Is Not a True Indicator

"Socialism is the philosophy of failure, the creed of ignorance and the gospel of envy," said Winston Churchill. Although it inevitably lowers living standards, socialism feels good - at least at the outset - as "free money" flows in great abundance. Keep this in mind as we examine the "good news" about consumer confidence.

Last week, it was reported that consumer confidence has seen an unexpected lift. In response, the sluggish stock market saw a manic 196-point rally.

This mania overrode losses from the week's other big news: Great Britain was put on negative credit watch by Standard & Poor's; the U.S. markets tanked on expectations of a similar downgrade domestically; and, Case-Shiller reported an unrelenting slide in home prices. In other words, the economic decline continues.

So, why are consumers so confident? They are being deceived by "free money" into believing in the power of socialism.

Since the start of the crisis, the Fed has held interest rates to an artificially low level, greatly helping borrowers who can obtain credit. Also, the Administration has made it clear that it will not allow a major bank failure, even if accounting rules have to be changed to give the appearance of solvency. Including guarantees, the entitlement-based stimulus packages have sprayed trillions of dollars into the economy, with minimal oversight.

None of these policies aid recovery, nor do they allow resources to be allocated more efficiently. Instead, they prolong economic dislocation, increase the influence of the federal government, and drag America deeper into debt.

It is true that the financial collapse that threatened does appear to have been averted by "officially" hiding and avoiding the problem of toxic assets. But the lesson from Japan, which did the same, is that avoidance is no cure and will only allow the wounds to fester.

In other words, the government is forcing the bone to heal before it's been reset, so that even if we're happy to be limping now, it will be that much harder to ever correct our gait down the road.

Most of the evidence shows, with the damage done to debtor countries like America, world trade is shrinking at an alarming pace. Socialists may argue that any further economic decline will simply be met by additional government spending. But this raises a novel and alarming question: how much more can the Administration spend? Or, more critically, how much more can it borrow?

We are in an age of massive deleveraging. Cash is scarce and becoming more scarce by the day. The recession is worldwide, and even creditor nations like China are spending their reserves on internal economic stimulus. In aggregate, major debtor governments have spending plans of some $5 trillion in the near term. From where will such a substantial sum come in a world long of paper debts but suddenly short of cash?

If the U.S. Treasury fails to find buyers for its massive calendar of debt, the Fed will have to raise interest rates. This will hit all borrowings, including mortgages. It will be likely to drive consumer spending down, bankruptcies up, and unemployment to depression-era levels.

Already, with the securitization markets dead and some $3.5 trillion of underwater commercial real estate loans, America's economy looks set to take another hammer blow - a blow that might be too big for Daddy Government to handle.

Consumers may be confident that something is "being done" to solve the economic crisis, but either do not understand or have misplaced faith in what the corrective policies amount to - socialism. It may feel good now, but it is neither wise nor sustainable.

All indicators are still negative, and the government's actions have merely covered over that weakness. Indeed, it appears that the Administration is driving us deeper into recession. It is likely that, when reality dawns, the rush from the U.S. dollars, stocks, and bonds will be truly devastating.

So, ignore the vagaries of consumer confidence polling and stick to the enduring laws of economics. Production leads to stocked shelves, but looting leaves them bare.

Comments

[capitalisth...:]

Nice article! You are correct when you advise to "stick to the enduring laws of economics." It is amazing how many economists do not understand that.

May 28 04:30 AM

[User 353732:]

Millions of Americans believe that while a free lunch cannot be had by all, a few certainly can get a free lunch or a very cheap one at the expense of their fellow citizens. The Government has, for, now succeeded in convincing these millions that they and only they (together with friends and family....)are about to receive this free lunch although others wont(or may have to pay extra for their lunches but that is no concern to those getting the free meal). The prospect of a (non existent) free lunch, any day now, has the natural effect of raising consumer "confidence" about their specific prospects.Multiply this delusion born of deception by several million consumers and,of course, the index rises. Once this index may have meant something real. Today it is a metric of consumer gullibility and media duplicity.

May 28 06:30 AM

[SivBum:]

On the other hand, 85% of the population are working, drawing a decent income. Now that banking crisis is over, they refinanced their mortgages to lower payments, $400 extra money from payroll tax reduction to pay for cheaper gasoline. Seems to be good reasons for them to feel good....now for the 15% underemployed, times sucks.

May 28 11:09 AM

[Konrad:]

I have to disagree with you though on consumer confidence not being a strong of a market indicator. In the U.S.A. the confidence of a consumer bridges the gap between buying a $2,000 vacation, or shoving the cash into a savings account or worse yet, "under the mattress"

In the first scenario the consumer is paying $2,000 for something that only costs...let us say $1,200 to provide. Yielding for the company involved a 60% gain on investment. The company invests more into employing more people or paying off its debts - and someone wins. In the second scenario the money helps banks and becomes concentrated in a single basket - and so far we don't have much proof of anyone winning anything - especially not the unemployed.

While liquidity for banks is great in the latter scenario, but the obtaining of loans is still difficult for individuals due to increased credit requirements. Corporations obtaining loans is a moot point as well if the consumers aren't spending their money due to low confidence levels.

So perhaps 70% of the American public is gullible enough to take the hook, but the hook gets them spending, so that those who are unemployed stand better chances of drawing an income again.

To worry about that gullibility is ironic considering that such approach to spending (the rain will never come so spend as you will) drove much of the development in the world.

May 28 01:40 PM

[Fighting Yoda:]

I have no confidence in the confidence indicator. These indicators are things that have created bubbles in the past, far too many.
----------------------...
Here is another intersting indicator to ponder on:
Latvian Hookers Signal No Recovery for Economy: Matthew Lynn May 27 (Bloomberg)
Two benchmarks we should all be monitoring more closely: extramarital affairs and the price of Latvian hookers. Both are telling us that there is still plenty of trouble ahead.
These two measures were proposed recently as reliable economic barometers, and they warrant consideration. Economists often say “animal spirits” play a role in keeping the wheels of the business cycle turning.
It has to do with people’s confidence levels,” says Rosie Freeman-Jones, a spokeswoman for the site. “When the markets are up, they think they can have an affair because they feel they can get away with anything. When the market hits the bottom, they are looking for a way to relieve the pressure.”
In a similar vein, John Hempton, who runs the financial blog Bronte Capital, has monitored the health of the Baltic economies based on the price of Latvian sex workers -- currently about 30 lati ($60) for the standard service.

May 28 02:49 PM

[Carey Rowland:]

So... for the faithful, somewhat wary, garden-variety solid middle consumer with a reasonably secure job...what would be the recommended application for a little discretionary income?
~buy a new Ford to replace the '98 model that's got 180,000 miles?
~6-month cd with small local bank?
~6-month cd with Bank of America?
~10-year Treasury?
~new wedding band for wife who dropped old one down drain a month ago?
~ vacation?
~WalMart stock?
~kid to college?
~new mattress? (sleep better)
~old mattress that needs padding?
~big stock of Campbell's soup?
~Campbell's soup stock?
~Chinese power company stock?

Which is the best use? This consumer needs to know.

May 28 07:09 PM

[Konrad:]

In the short run I would probably go with getting a newer (not new) car unless you have a new transmission and fresh engine work on the old car. Though I'd probably buy a Hyundai instead; same basic idea and far better customer support.

Rule of thumb is to avoid buying a new car unless you truly need it due to your profession.


On May 28 07:09 PM Carey Rowland wrote:

> So... for the faithful, somewhat wary, garden-variety solid middle
> consumer with a reasonably secure job...what would be the recommended

May 29 01:44 PM