Wall Street Can't Count on the American Consumer Anymore

It was always said that come what may, you can count on U.S. consumers. Not these days. For nearly 20 years, consumer spending has outpaced income growth in America. Credit everywhere they turned, the wealth effect of the dot com stock market, and then the ATM-like appeal of rising house prices was enough to make the word "budget" foreign to most Americans. Shop 'til you drop was the rallying cry from coast to coast.

Too bad they did just that. We haven't seen this many dropped consumer corpses in the aisles since John Steinbeck was the contemporary chronicler of American culture.

The current financial crisis and attendant economy that grows nothing but joblessness has kicked consumers in the teeth. Finally giving up on government to limit the gimmicks of financial firms, households have ignored Washington's efforts to get the binge going again. Instead, Joe Sixpack and his wife are giving the finger to Goldman Sachs, the Treasury, and the Fed and taking care of some toxic assets closer to home. Yes, household balance sheets are getting fixed. People are buying less and saving more, which is catastrophic to the debt-based economy built by government, banks, and big business over the past fifty years or so. A full 70% of the economy depends on Joe buying trifles he doesn't need to keep trifle manufacturers in business so they can contribute to campaigns and lobbying efforts.

What's good for Joe, then, ain't good for the economy. At least not the fraud that the modern economy has become. Wall Street profits come from selling a lot of trifles, and if Joe ain't buying, earnings won't grow. The question then becomes: Is Joe buying?

Nope.

Consumer credit fell at an annual rate of 10.4% in July, erasing a record $21.5 billion. Revolving debt like that on credit cards dropped 8%, while non-revolving debt like auto loans dropped 11.7%. Those came to dollar amounts of $6.1 billion and $15.4 billion respectively. As of July, consumer credit has been shrinking for six months in a row.

Good for you, Joe! Keep up the good work. Cut up those credit cards and start paying cash. Read fine print. Don't borrow. Save. Send the government, bank, and big business scum back to the drawing board to figure out some new way to suck cash out of a different generation of suckers.

As for the economy, don't worry. Green shoots, remember? We'll do just fine on 30% firepower. Hey, it's better than nothing and in these new happy times, better than nothing is the same as fantastic.

Comments

[conceptwizard:]

It no longer makes any sense for people to spend more than they can afford, nor is it possible. US households doubled their debt in the last seven years to nearly $14 trillion. The massive borrowing binge fueled economic growth and pushed assets--particularly housing--steadily higher. But the spending-spree was only possible because of low interest rates, lax lending standards and deep-pocketed trading partners who were only-too-eager to purchase boatloads of US securities, bonds (Fannie and Freddie) and Treasuries. Now conditions have changed; funding has dried up and central banks and foreign investors have limited their purchases to Treasuries. Consumers are left to fend for themselves in a hostile environment where both jobs and credit are scarce.

Household budgets have never stretched as far as they are today. Housing prices have dropped 33 percent from their peak in 2007, but household deleveraging has only just begun. There's a lot of belt-tightening to do if families plan to reduce their aggregate debt by roughly $2.5 trillion and return debt-to-equity ratios to their normal trend-line. Policymakers need to focus on debt-relief and mortgage-principle writedowns to ease the transition and get people back on their feet again.

Sep 09 10:06 AM