America’s Consumer Economy Needs to Consume Less

For the benefit of new readers, we are long emerging markets, gold, and Japan. We are short U.S. stocks, bonds, the dollar and real estate. We are, recently, short oil too.

Looking at the long term, we suspect that oil will be expensive for a long time. But in their enthusiasm, markets tend to overdo it. Our guess is that they’re overdoing it in the oil market now…or close to it.

But let us turn back to the U.S. economy.

“The aggressive rate-cutting campaign by the US central bank may be at an end,” says an article in the International Herald Tribune. The Fed is caught in the same trap as are all Americans. Prices are rising, but the economy is soft. Consumer price increases are probably nearer to 10% per year…than to the 4% reported by the Labour Department.

Wholesale and raw materials prices are soaring. And while wages are increasing in the developing world, there are few people in the United States reporting higher earnings.

This puts workers – especially the proles who compete most directly with foreign factory labor – in a tough spot. They often drive big, gas gourmand pick-up trucks. They typically live far from their jobs (they were lured to far out suburbs during the recent housing boom). And now they’re paying almost $4 a gallon for gas and $5 for a hamburger – not to mention health insurance.

This is a situation that calls out for correction. America’s consumer economy needs to consume less. That is what is happening…and what is dragging the whole economy down with it.

“Consumers are too tapped out to lead the economy out of its troubles, according to a report on household credit released Wednesday,” says CNNMoney.

“And even after things turn around, consumers weighed down by debt won’t be able to spend as they did in the past.

“Americans have little money on hand and banks aren’t eager to lend anymore,” said Scott Hoyt, senior director of consumer economics at Moody’s, which compiled the quarterly outlook report with Equifax. Consumers had the lowest percentage of unspent cash in the first quarter of 2008 since fall 1991, the report found.

“It will also take years for consumers to straighten out their household budgets since their debt burdens are near record highs. Americans put 14.3% of their disposable income toward debt in the first quarter, near the record 14.5% reached at the end of 2006. By comparison, the rate was 12.3% in 2000.

“Consumers just don’t have the cash right now that they had a few years ago,” said Hoyt, who expects the recovery to begin in the second half of 2008. “This obviously impacts their ability to spend, their confidence, their ability to service their debt and it’s going to continue even as the economy recovers.”

“Before the 1980s, consumer spending made up about 63% of the nation’s gross domestic product, a key measure of the economy. Since then, it has grown to about 70% as Americans took on more debt to fuel their buying habits.

“Going forward, consumer spending will likely drift back to about 67% of GDP, Hoyt said. Americans simply can’t sustain a near-zero savings rate and an ever-growing debt load.”

*** Among the things that are correcting is the financial industry. In the long boom that began in the early ’80s and continued until 2007, finance contributed an ever-larger piece of U.S. corporate earnings – from near 10% to near 40%. Now that the credit cycle has turned down, so have the earnings of the financial sector. Obviously, the finance sector grows by lending people money. When their debts get too big, they have to stop borrowing and start paying back. The downside of a credit cycle brings the financial industry less profit.

“We had a spectacular era of financial success that was extended by the subprime mortgage mania to 2007,” says Barton Biggs, who was chief global strategist at Morgan Stanley until 2003. “But I think the golden age of Wall Street is over.”

“When you’re in a hole,” David Walker, former U.S. Comptroller General and star of our documentary, I.O.U.S.A. , said this morning on CNBC’s SquawkBox, “stop digging.”

You can see his full interview here:

An Inconvenient Debt

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to