A Consumer Economy Doesn’t Work

Not much time to write this morning…or is it evening?

We don’t know. But yesterday, we promised the crowd, here at the Investment Symposium, that we would have some answers by Friday. Today, we listened to other speakers…hoping something would come up.

What does it all mean? How come oil is backing off? Why are banking stocks going up? How can the United States get out of its debt trap?

And the ‘civil war’ between inflation and deflation? How will it end? With a bang of hyper-inflation? Or a whimper of falling prices, bankruptcies and recession?

The best we’ve been able to come up with so far is that – like any civil war – the civilians are getting killed. They’re ambushed by higher consumer prices one day…and bushwhacked by falling asset prices the next. Living standards are falling back down to levels not seen in 40 years.

Many times, we’ve remarked that wages in the United States have not gone up in a very long time. The latest figures on the subject show no real increase since 1968. Since then, every penny of hourly pay increase has been matched by a cent of consumer price inflation.

Only the rich made out well, we were told. They owned assets. And asset prices have soared. But if you quote stock prices…or housing prices…in terms of the number of gallons of gasoline they will buy, you find that even “the rich” aren’t as rich as they think they are. The Dow would get you about 2,200 gallons of gas in 1968. Today, at $4.10 a gallon, the Dow is equal to about 2,200 gallons. ld get you about 2,200 gallons of gas in 1968. Today, at $4.10 a gallon, the Dow is equal to about 2,200 gallons.

Of course, in real terms, the Dow came down after ’68. It will probably do the same now.

“Well, you don’t seem to be very depressed about it,” said a local reporter, doing an interview. “In fact, you seem to be in a good mood.”

“Why should I be in a bad mood?” we replied. “Most people are no better off than they were when I was 19 years old. Clearly, something isn’t working right. If people are going to get richer, they’re going to have to do things differently – such as stop trying to spend their way to wealth. A consumer economy doesn’t work. It never worked. Kurt Richebächer was right about it all along, RIP. The only way to reliably become wealthier is the old fashioned way – you have to spend less than you earn. I know this may come as a shock to your viewers, but it’s true. I urge them to try it: spend less than you earn. Then, you’ll have more money. It’s like magic…or something…

“Besides, I’m in a good mood because everything is happening as it should. When people spend too much money…when speculators gamble too recklessly…when the government gives out too much cash and credit – there have to be consequences. A free market is not a system designed to give people a free lunch. It’s designed to make them better people – by rewarding them when they do the right thing and punishing them when they do the wrong thing. For the last 20 years – at least – people have been doing things that the old economists would have regarded as ‘moral failings.’ That is, they’ve been spending more than they make…for example. Now, they’ve being punished. They’re being re-educated. And they’re going to end up poorer…but wiser.

“Frankly, we’d rather be dumber and richer, but the markets don’t give you that choice. They separate fools from their money. That’s what they’re doing now. So, what’s to be unhappy about?”

Pity the poor fellow with the big suburban house…far from civilized life…and a big mortgage, and a big, gas-gourmand vehicle to get him around. He’s got to learn. He’s got to downsize…to cutback…to spend less money.

But even this fellow will be better off for it. He’ll be able to save some money…build some wealth…achieve great independence – rather than being a slave to his SUV, his house, his mortgage company, and his highway.

It is a miserable way to live. He’s living in a “cartoon,” said James Kunstler in his speech on Wednesday morning. Then showing a photo: “It’s a house with no windows on one side. That’s not a real house; it’s a cartoon house. And look at the porch. It’s 17 inches wide.”

He might have pointed to the shutters too. The typical suburban house has no real shutters. It has cartoon shutters, made of plastic and bolted to the wall. You can’t use them to keep out the sun or the cold. They’re just there so the owner can pretend he has a house with shutters.

Mr. Kunstler is a critic of the suburbs. You get the impression that he’s happy to see $4 gasoline – it means the “project of suburbia is over,” he says. “One and a half to three trillion dollars worth of capital – lost,” he continues, referring to the money spent building out suburbs that, at $4 gasoline, serve no useful function. But good riddance.

And so you see, dear reader, we’re all going to be better off. When this cartoon period is behind us – with its phony houses, its phony profits, its phony progress, and its phony GDP growth – people can begin saving again…and maybe their wages will even begin to go up again.

*** “But wait,” asked our interviewer, “if the average consumer cuts back, won’t that make the situation worse?”

“Of course it will seem to,” was our retort. “When the going was good, he spent money he didn’t have on things he didn’t need. Now, the tables have been turned against him. Now he won’t spend even the money that he has; he’ll use it to pay down his debt and increase his savings. If savings rates just go back to where they were in the early ’90s, it will take more than $300 billion out of the consumer economy. It will seem like a deep, long recession…but people will actually be better off as a result.”

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

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