On June 12th , I wrote a commentary titled “The Death of the U.S. Consumer Economy”. In that piece, I detailed the two, concurrent trends which guarantee a paradigm-shift in the U.S. consumer-economy.
The first of those trends is the maximization of available credit. Not only is the U.S. a consumption-based economy – an inherently unsustainable economic model – but for the last decade this unsustainable economic model has become entirely dependent on an exponential increase in debt/credit. This has resulted in me labeling the U.S. a “Ponzi-scheme economy”, since Ponzi-schemes also rely upon exponential inflows of capital in order to be sustained.
The problem for the U.S. now (and for the future) is that not only can exponential increases in debt no longer be financed by U.S. consumers, but this same limitation also applies to all three levels of U.S. government. For the state and municipal levels of government, this means a continuing stream of lay-offs for years to come – followed by many more years of austerity. For the federal government, it has already resulted in large portions of the current deficit being “monetized” (i.e. printing money to pretend to “pay its bills”).
With no possibility of future growth being sustained through increased credit/debt, any genuine economic recovery requires employment growth. This brings me to the second “nail” in the economic coffin of the United States. An economy roughly 70% dependent upon consumption must also rely upon service-sector jobs to provide the majority of its employment.
Public sector employment is certain to shrink through the combination of a record-collapse in revenues, and exploding costs for health-care and other entitlement programs. Tax increases and fee increases are also inevitable.
For the private sector, the combination of a lower marginal propensity to consume, and the massive down-sizing already underway in the U.S. retail sector has created a death-spiral of fewer consumer-dollars leading to more retail sector lay-offs, leading to even less consumer spending.
While I try to avoid the use of economic jargon, the “marginal propensity to consume” (MPC) is a critical concept for the U.S. consumer-economy. This statistic refers to the portion of each new dollar of income/wealth which is spent. For a consumer economy which is also highly leveraged with debt, the change of even a few percentage points in the MPC can literally spell the difference between an economic “boom” and economic disaster.
In the U.S. economy, three separate dynamics are all simultaneously at work to lower the U.S.'s MPC. First of all, there is the ever-increasing inequality of wealth distribution in the U.S. economy. In a typical capitalist society, the lop-sided distribution of wealth generally involves the wealthiest 20% of society holding 80% of the wealth (with the inverse ratio of the bottom 80% holding only 20% of the wealth).
In the United States, the top 20% holds 85% of the wealth, meaning the lower 80% hold a measly 15% of the wealth. This may not seem like a huge difference, however what it means is that the 80-percentile demographic in non-U.S. societies have (on average) a 33% higher standard of living. This has a large impact on U.S. consumption at both ends of the wealth spectrum.
It is an established principal of economics (and arithmetic) that the higher one's wealth-level, the lower their MPC. In other words, really wealthy people spend only a tiny portion of each new dollar of wealth – providing virtually zero social or economic “utility” in such individuals getting richer. Meanwhile, while the poorer members of society spend all that they have (an MPC of 100%), because they are steadily getting poorer, they simply have less money to spend every year.
This principal of arithmetic was already understood nearly two thousand years ago. It was at that time that Greek philosopher Plutarch wrote
an imbalance between rich and poor is the oldest and most fatal ailment of all republics.
Modern economics has simply quantified this principle by noting that the reduced consumption which is inevitable with increasing wealth inequality guarantees a less-healthy economy than if wealth distribution were more equal.
The second dynamic which is lowering the U.S. marginal propensity to consume is the reduction of credit available to U.S. consumers – the first time this has happened in the 40 years for which such records have been kept. The excessive reliance upon debt/credit has meant that many U.S. consumers have had a MPC of greater than 100%. In fact, for a period of two years (at the peak of U.S. bubble-insanity), the entire U.S. economy had a marginal propensity to consume of greater than 100%.
This is simply the alternative means of expressing how the U.S. economy had a “negative savings rate” for roughly two years. What makes such a statistic so totally appalling is that the top 1% in the U.S. wealth pyramid (who hold 33% of all wealth, by themselves) have an extremely low MPC. Thus for the entire U.S. economy to have a net, negative savings rate implies a large segment of the population spending 10%, 15% or even 20% more than they were earning.
With this historic reduction in U.S. consumer credit, there can be few if any Americans still “consuming” more than 100% of what they earn. This dramatic cap on credit guarantees another significant drop in MPC.
The third dynamic reducing the MPC is a voluntary reduction in consumption by the people in the middle. Those Americans who still have “discretionary income” to spend are choosing to spend less. A Reuters article provides numbers which are nothing short of catastrophic for U.S. retailers. A full 25% of the U.S. population state they have decided to permanently reduce spending.
While some surveys are less than convincing, there are several excellent reasons to treat this consumer pledge very seriously. To begin with, U.S. consumer debt is so grossly excessive by any/every standard in history. Reducing this mountain of debt is simply a reflection of a return to sanity. Even if those massive debts did not exist, the non-existent “savings rate” for the U.S. economy was also an aberration, not only compared to any/every other country – but also an aberration in American behavior. Statistically, one would expect many years of reduced discretionary spending as the “pendulum” of behavior swings back.
To counter this, the U.S. propaganda-machine has invented new “buzzwords” for the media-parrots to recite incessantly: “frugality fatigue”. This laughable invention of the propagandists presents us with the idea that after U.S. consumers have just finished the wildest thirty-year spending-binge in human history, that one year of extremely modest saving has “exhausted” them.
A fourth drag on consumer spending is the falling wealth of U.S. consumers. I covered part of this in a recent commentary (see “Housing Sector Mirage”). A shocking one in seven U.S. mortgage-holders are already delinquent on their mortgage or in foreclosure – and 5 out 6 of those people will end up losing their homes if previous trends hold. Obviously people who lose their homes have lost most or all of their wealth – and it will be many years (if ever) before such households spend at previous levels.
Readers will also recall how the “leaders” of all the banks who proudly stood in line for their hand-outs promised to “increase their lending” to U.S. consumers and businesses in order to “lead the U.S. economy” out of recession. These same “leaders” are now prepared to engage in the largest bonus-orgy in corporate history.
And what about their “promise” to “increase lending” to “lead the U.S. economy out of recession”? To quote the FDIC,
loan balances at commercial banks fell at the fastest clip in at least 25 years in the third quarter” (since those records were first kept). This is quite the statement, given that lending by U.S. banks had already been falling for every quarter since Wall Street banksters made their “promise.
For those optimists who believe it's only a matter of “toughing it out” for a few years before the U.S. economy regains its footing, think again. It was also recently reported that more than 50% of every new dollar of federal debt is now simply interest payments on existing debt. All of this current, massive deficit-spending is not “building the U.S. economy” on some path to future prosperity, it's simply racking up much more debt.
The precise nature of this down-sizing has already been spelled-out: a massive increase in on-line retailing, implying a massive decrease in retail outlets. As with the U.S. manufacturing sector, when just a few companies “outsourced” their production to Asia there was a net benefit. However, once the whole U.S. manufacturing base embraced that trend, it was economic suicide.
For a tiny number of Wall Street denizens, this Christmas will be a party of epic proportions. However, for the vast majority of the U.S. population, it is simply another bleak holiday season – with many more to come. The U.S. consumer is dead. Any possible “resurrection” is at least a generation away.
Disclosure: I hold no position in Goldman Sachs, JP Morgan, or Morgan Stanley