The Great Debate For The Bears-No Spending Part II
Here is the excerpted Barrons article I referenced above. Highlights are mine.
........The very rich, it seems, aren't so different from the rest of us in terms of getting into hock. But regular Americans have little choice but to hunker down, cut spending to pay down debt, just as they have done in every recession.
This time, however, they won't be returning to their free-spending ways as they did after every other downturn. Indeed, the deleveraging by consumers probably has just begun.
What's happening is a matter of simple accounting: If spending exceeds income, borrowing has to increase or assets have to be liquidated......{T}he real median income of American households is no higher than in 1973, after inflation, according to Shadow Government Statistics.
"Recent reporting has shown not only that real growth in household income has failed to keep up with inflation, but that consumer debt and net worth are contracting paces previously not seen in the post-World War II era," writes SGS's John Williams.
Indeed, he adds, "the official numbers show households struggling to make ends meet for at least the last decade. Without adequate income growth, consumers met the consumption needs and/or desires through expanded debt.
"Such activity was encouraged openly by Federal Reserve Chairman Alan Greenspan, and the bulk of economic growth in recent years, as a result, was due largely to debt expansion, not to healthy growth in consumer income," Williams concludes.
MacroMavens' Stephanie Pomboy........charts consumer installment debt rising relative to disposable personal income -- even as employment growth fell off sharply -- early in the decade. ....SGS' Williams shows consumer borrowing is undergoing an unprecedented contraction. "Weak real incomes and contracting consumer credit are not the stuff of which economic booms, let alone recoveries, are made," he observes.
Meanwhile, consumers can liquidate savings, that is, their net worth, to make ends meet, he continues. But the Federal Reserve's Flow of Funds data show a record plunge in households' net worth through the first quarter (the most recent numbers available until second-quarter data are released later this week.)
Since then, of course, the stock market has levitated about 50% in round numbers from its March lows. And the evidence seems to be that at least some lucky people are using the rally to cash in their winnings.
Those would be corporate insiders, according to Trim Tabs' tally. In August, insiders sold $6.9 billion, the most since May 2008, and bought only $240 million worth -- a 29-to-1 sell-to-buy ratio -- "exactly what we would expect at a market top," Trim Tabs' Weekly Liquidity Report says.
For everyone else not fortunate enough to have stock holdings to tap, there's little choice but to tighten their belts.......Spending on essentials -- in food and beverage and drug stores -- is holding up, rising 0.6% in the year to July, while spending on everything else is off 6.2%. That gap of 6.8% is the widest since data began in 1992...
"A gap this wide looks like a real structural shift in spending behavior, as austerity becomes the new normal," they write. {writes Philippa Dunne and Doug Henwood in the latest issue of The Liscio Report cited in the Barons article} "Though Americans have shaken off bouts of prudence before.....it's probably going to take some time before anything resembling extravagance returns."
And extravagance doesn't fully explain the debt-driven consumption of recent years, TLR's Dunne and Henwood add. Much of the spending has been for medical care, apparently as employers shift more of those expenses to employees. Meanwhile, the cost of benefits are rising more slowly than pay for the first time in 25 years -- not because of any slowing of medical inflation but because of higher co-pays or dropped coverage.
....If Americans have indeed changed their spendthrift ways, the standard fiscal stimuli will be impotent to spur the economy. Tax cuts will be saved rather than spent. (Use-it-or-lose-it gimmicks such as cash-for-clunkers or the $8,000 gift to first-time home buyers that expires Nov. 1 may accelerate purchases that probably would be made anyway. After the sugar rush fades, sales revert to form.)
Meantime, the American economy is likely to remain mired in its debtors' prison.
This time, however, they won't be returning to their free-spending ways as they did after every other downturn. Indeed, the deleveraging by consumers probably has just begun.
What's happening is a matter of simple accounting: If spending exceeds income, borrowing has to increase or assets have to be liquidated......{T}he real median income of American households is no higher than in 1973, after inflation, according to Shadow Government Statistics.
"Recent reporting has shown not only that real growth in household income has failed to keep up with inflation, but that consumer debt and net worth are contracting paces previously not seen in the post-World War II era," writes SGS's John Williams.
Indeed, he adds, "the official numbers show households struggling to make ends meet for at least the last decade. Without adequate income growth, consumers met the consumption needs and/or desires through expanded debt.
"Such activity was encouraged openly by Federal Reserve Chairman Alan Greenspan, and the bulk of economic growth in recent years, as a result, was due largely to debt expansion, not to healthy growth in consumer income," Williams concludes.
MacroMavens' Stephanie Pomboy........charts consumer installment debt rising relative to disposable personal income -- even as employment growth fell off sharply -- early in the decade. ....SGS' Williams shows consumer borrowing is undergoing an unprecedented contraction. "Weak real incomes and contracting consumer credit are not the stuff of which economic booms, let alone recoveries, are made," he observes.
Meanwhile, consumers can liquidate savings, that is, their net worth, to make ends meet, he continues. But the Federal Reserve's Flow of Funds data show a record plunge in households' net worth through the first quarter (the most recent numbers available until second-quarter data are released later this week.)
Since then, of course, the stock market has levitated about 50% in round numbers from its March lows. And the evidence seems to be that at least some lucky people are using the rally to cash in their winnings.
Those would be corporate insiders, according to Trim Tabs' tally. In August, insiders sold $6.9 billion, the most since May 2008, and bought only $240 million worth -- a 29-to-1 sell-to-buy ratio -- "exactly what we would expect at a market top," Trim Tabs' Weekly Liquidity Report says.
For everyone else not fortunate enough to have stock holdings to tap, there's little choice but to tighten their belts.......Spending on essentials -- in food and beverage and drug stores -- is holding up, rising 0.6% in the year to July, while spending on everything else is off 6.2%. That gap of 6.8% is the widest since data began in 1992...
"A gap this wide looks like a real structural shift in spending behavior, as austerity becomes the new normal," they write. {writes Philippa Dunne and Doug Henwood in the latest issue of The Liscio Report cited in the Barons article} "Though Americans have shaken off bouts of prudence before.....it's probably going to take some time before anything resembling extravagance returns."
And extravagance doesn't fully explain the debt-driven consumption of recent years, TLR's Dunne and Henwood add. Much of the spending has been for medical care, apparently as employers shift more of those expenses to employees. Meanwhile, the cost of benefits are rising more slowly than pay for the first time in 25 years -- not because of any slowing of medical inflation but because of higher co-pays or dropped coverage.
....If Americans have indeed changed their spendthrift ways, the standard fiscal stimuli will be impotent to spur the economy. Tax cuts will be saved rather than spent. (Use-it-or-lose-it gimmicks such as cash-for-clunkers or the $8,000 gift to first-time home buyers that expires Nov. 1 may accelerate purchases that probably would be made anyway. After the sugar rush fades, sales revert to form.)
Meantime, the American economy is likely to remain mired in its debtors' prison.
Link: http://online.barrons.com/article/SB125294123836008951.html?mod=BOL_hps_dc {Subscription may be required}
posted by CR English at 6:34 AM
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