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Consumers are Thinking Smaller

Consumers are Thinking Smaller
by Bill Bonner, The Daily Reckoning, June 22, 2009
There are two major schools of thought on the bailout:
The first of which believe that the banks are still in trouble and need to be nationalized. (Roubini, Krugman)
The second school of thought thinks that the banks are still in trouble, but that a public/private partnership can recapitalize them as they work their way out of the hole. (Geithner, Gross)
As usual, we play hooky. Here at The Daily Reckoning, we’re not in either school. In our view, the banks are in trouble because they lent too much money to too many people who couldn’t pay it back. They should take the verdict of the market…and hang.
Hey…won’t this cause a depression?
Ah…here is where we really part company with our fellow bipeds. We in a minority…such a small minority that all its adherents put together could probably fit into an elevator. Because we believe that a depression is just what America needs…and what it’s going to get regardless of what the meddlers do. In fact, we think they will turn an ordinary depression into a great one. Or maybe even a “greater depression,” as our old friend Doug Casey puts it.
California demonstrates what has to happen in an honest slump. They’re preparing for “deep cuts.” Consumers are cutting back too. That’s probably the most important new trend to come with the post-Bubble era. Consumers are thinking small…smaller houses, smaller utility bills, smaller cars, smaller debts, smaller retirements.
That’s a change that’s likely to stick. They’ve seen where thinking big got them. Now, small is beautiful.
Forgive us for repeating ourselves; but this is important. The main source of economic growth over the past 25 years was consumers’ willingness to go into debt to buy things. This spurred industries in Asia to marvelous feats of production. In the United States, it caused a big increase in corporate profits. You see; labor is industry’s biggest expense. Taken all together, U.S. companies pay U.S. employees who buy the goods and services their employers produce. So, businesses have the revenue from selling to employees on the right side of the ledger and the cost of paying wages on the left.
But when employees began to buy more on credit, it was like a bartender who never asked customers to pay up. The companies had more revenue than ever. But they had no offsetting labor cost. Employees were spending money they never earned, so the extra sales went to the bottom-line as profit.
Earnings rose on Wall Street as customers went further and further into debt. The companies selling credit–the finance industry–did especially well. And now it’s payback time. The bartender wants his money! Earnings and sales are falling as customers try to get out of debt. They collect the same wages–for a while–and cut back on spending.
Consumers are saving more and spending less. This is a good thing for the individual consumer. But it is a bad thing to the economists who believe in consumer-led GDP growth.
In fact, says The Richebächer Letter’s Rob Parenteau, “Total U.S. retail sales have rolled back to levels we haven’t seen since 2005. The freeze in consumer spending and the consumer economy could actually take many more years to thaw.”
All of a sudden, the consumer is acting as though he had some sense. Naturally, government officials are determined to put a stop to it.
More banks were shut down last week. Banks go bust all the time. Nobody particularly cares. But some banks are said to be “too big to fail.” If they go down, people believe, they take the whole economy with them.
So the feds step in…either to nationalize the big banks…or to subsidize them. This, we are told, avoids worse damage.
Does it? How? If a bank has made a bad loan, there is a real loss of capital. Money has been spent–perhaps on concrete…perhaps on software…maybe on champagne. It’s not coming back. But, then come the bailouts. The people who made the mistakes are given an opportunity to make more of them–by the same people who were looking over their shoulders when they made the first ones. What exactly happens to the money they receive is a matter of hot dispute. Some goes to pay the bankers’ bonuses. Some goes to pay their health spa fees and some gets lent out–in loans that are either better or worse than those that got them into trouble.
None of this corrects the mistakes. Depression is a natural thing. In our lexicon, it is the end of a major credit expansion. It is the point in the economic cycle when it becomes clear that many of the things for which credit was used were not good uses of money. The losses, mistakes and bad investment positions need to be recognized, worked out and written off. It takes time. And it is painful. But like dentistry, it is sometimes necessary.
You can paint a rotten tooth white and pretend you’ve fixed it. And there are a lot of people ready with a paintbrush. But that won’t stop the pain. Better to yank it out…and get on with it.
As consumers stop spending, business sales and earnings fall…and so does employment. The unemployment rate is now over 10% in more than a quarter of the states. It’s sure to get worse. By the end of the year, it should be over 10% nationwide. As people lose jobs, they begin to think even smaller. Las Vegas holiday? Forget it! New car? Not without a subsidy; otherwise, we’ll stick with the clunker. Go out for dinner? Nah…let’s stay at home…and we’ll plant a garden too!
Welcome to a depression. Not such a bad thing, really. Just a period of adjustment…a time for fixing, re-organizing, downsizing, and mending. There’s a time to every purpose under heaven. This is the time to take stock and shape up.
But wait again. It doesn’t FEEL like a depression. Where are the soup lines? Where are the Okies packing up and moving to California? Where are Ziegfield Girls, the Civilian Conservation Corps and Eleanor Roosevelt? How come this depression’s not in black and white?
Well…because this is a 21st century depression. This depression is in living color…and it comes to a world that is much richer than the world of the 1930s. Besides, it is just 1930…not 1932. Give it time
by Bill Bonner, The Daily Reckoning, June 22, 2009
There are two major schools of thought on the bailout:
The first of which believe that the banks are still in trouble and need to be nationalized. (Roubini, Krugman)
The second school of thought thinks that the banks are still in trouble, but that a public/private partnership can recapitalize them as they work their way out of the hole. (Geithner, Gross)
As usual, we play hooky. Here at The Daily Reckoning, we’re not in either school. In our view, the banks are in trouble because they lent too much money to too many people who couldn’t pay it back. They should take the verdict of the market…and hang.
Hey…won’t this cause a depression?
Ah…here is where we really part company with our fellow bipeds. We in a minority…such a small minority that all its adherents put together could probably fit into an elevator. Because we believe that a depression is just what America needs…and what it’s going to get regardless of what the meddlers do. In fact, we think they will turn an ordinary depression into a great one. Or maybe even a “greater depression,” as our old friend Doug Casey puts it.
California demonstrates what has to happen in an honest slump. They’re preparing for “deep cuts.” Consumers are cutting back too. That’s probably the most important new trend to come with the post-Bubble era. Consumers are thinking small…smaller houses, smaller utility bills, smaller cars, smaller debts, smaller retirements.
That’s a change that’s likely to stick. They’ve seen where thinking big got them. Now, small is beautiful.
Forgive us for repeating ourselves; but this is important. The main source of economic growth over the past 25 years was consumers’ willingness to go into debt to buy things. This spurred industries in Asia to marvelous feats of production. In the United States, it caused a big increase in corporate profits. You see; labor is industry’s biggest expense. Taken all together, U.S. companies pay U.S. employees who buy the goods and services their employers produce. So, businesses have the revenue from selling to employees on the right side of the ledger and the cost of paying wages on the left.
But when employees began to buy more on credit, it was like a bartender who never asked customers to pay up. The companies had more revenue than ever. But they had no offsetting labor cost. Employees were spending money they never earned, so the extra sales went to the bottom-line as profit.
Earnings rose on Wall Street as customers went further and further into debt. The companies selling credit–the finance industry–did especially well. And now it’s payback time. The bartender wants his money! Earnings and sales are falling as customers try to get out of debt. They collect the same wages–for a while–and cut back on spending.
Consumers are saving more and spending less. This is a good thing for the individual consumer. But it is a bad thing to the economists who believe in consumer-led GDP growth.
In fact, says The Richebächer Letter’s Rob Parenteau, “Total U.S. retail sales have rolled back to levels we haven’t seen since 2005. The freeze in consumer spending and the consumer economy could actually take many more years to thaw.”
All of a sudden, the consumer is acting as though he had some sense. Naturally, government officials are determined to put a stop to it.
More banks were shut down last week. Banks go bust all the time. Nobody particularly cares. But some banks are said to be “too big to fail.” If they go down, people believe, they take the whole economy with them.
So the feds step in…either to nationalize the big banks…or to subsidize them. This, we are told, avoids worse damage.
Does it? How? If a bank has made a bad loan, there is a real loss of capital. Money has been spent–perhaps on concrete…perhaps on software…maybe on champagne. It’s not coming back. But, then come the bailouts. The people who made the mistakes are given an opportunity to make more of them–by the same people who were looking over their shoulders when they made the first ones. What exactly happens to the money they receive is a matter of hot dispute. Some goes to pay the bankers’ bonuses. Some goes to pay their health spa fees and some gets lent out–in loans that are either better or worse than those that got them into trouble.
None of this corrects the mistakes. Depression is a natural thing. In our lexicon, it is the end of a major credit expansion. It is the point in the economic cycle when it becomes clear that many of the things for which credit was used were not good uses of money. The losses, mistakes and bad investment positions need to be recognized, worked out and written off. It takes time. And it is painful. But like dentistry, it is sometimes necessary.
You can paint a rotten tooth white and pretend you’ve fixed it. And there are a lot of people ready with a paintbrush. But that won’t stop the pain. Better to yank it out…and get on with it.
As consumers stop spending, business sales and earnings fall…and so does employment. The unemployment rate is now over 10% in more than a quarter of the states. It’s sure to get worse. By the end of the year, it should be over 10% nationwide. As people lose jobs, they begin to think even smaller. Las Vegas holiday? Forget it! New car? Not without a subsidy; otherwise, we’ll stick with the clunker. Go out for dinner? Nah…let’s stay at home…and we’ll plant a garden too!
Welcome to a depression. Not such a bad thing, really. Just a period of adjustment…a time for fixing, re-organizing, downsizing, and mending. There’s a time to every purpose under heaven. This is the time to take stock and shape up.
But wait again. It doesn’t FEEL like a depression. Where are the soup lines? Where are the Okies packing up and moving to California? Where are Ziegfield Girls, the Civilian Conservation Corps and Eleanor Roosevelt? How come this depression’s not in black and white?
Well…because this is a 21st century depression. This depression is in living color…and it comes to a world that is much richer than the world of the 1930s. Besides, it is just 1930…not 1932. Give it time.
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