Consumer Spending Falls Hard As Consumers Guard Their Wallets

“U.S. consumers cut back sharply,” says the front page of today’s International Herald Tribune.

“Decline is biggest since ’80; data show a shrinking GDP.”

Well…what did they expect?

We are in an especially cheerful mood here at the Paris headquarters of Markets and Money. Why? Because everything is happening as it should. God is in his Heaven. The Queen is on her throne. And the Big Boom is turning into a Big Bust.

As predicted in this space, many times, consumer spending is falling hard. But what else could it do?

Let’s look back over our shoulder to see how we got to this place.

The feds goosed up the slumping economy in 2002 with history-making inputs of new cash and extra-easy credit. What followed was an once-in-a-lifetime bubble in housing…which lifted up the entire world economy. Americans bought things they couldn’t really afford with money they didn’t really have. And the whole world rejoiced.

But when housing prices got so far out of whack that the average person couldn’t dream of buying the average house, something had to give.

Housing began to fall…taking the mortgage-backed speculative finance business down with it.

At first, few people took it serious; so it took a long time for homeowners to react. But they had to cut spending sooner or later.

In an economy that is nearly 80% based on consumer spending, less spending is bound to cause a recession.

And when businesses take in less revenue, their stock prices are sure to fall.

All that has happened, just like it should.

But what should happen next?

First, we should begin to see some shocking unemployment numbers. It takes time to prune payrolls, but we should be seeing the deadwood on the ground very soon. And then some green wood. Good, young employees will be cut along with the baby boomers.

A new hotel opening in Las Vegas put out a call for employees. It got 67,000 applicants for 500 jobs. And American Express said yesterday that it will cut 7,000 employees.

Unemployment is officially at about 6% now. It will pass 10%…and keep going up.

Then, we will begin to see a big increase in bankruptcies, defaults, and foreclosure. Even after layoffs and cutbacks, businesses will be unable to pay their bills. Laid-off workers will find it tough to find new jobs; they will declare bankruptcy too. Corporate bonds will become worthless. Billions in automobile and credit card debt – along with mortgage debt – will become uncollectible.

What else will happen?

Globalization will walk backwards. This time, there will be no need for Misters Smoot and Hawley. Mr. Market will do their work for them. Global trade will collapse as the consumers of first and last resort – Americans – stop spending.

We’ve already seen this happening in the capital equipment area. Volvo got orders for 41,970 of its big trucks in the 3rd quarter of 2007. In the 3rd quarter of 2008, meanwhile, Volvo got a total of 155 orders.

As Mark Gilbert reports at Bloomberg, if no one buys trucks, you don’t have to ship trucks. Shipping rates are collapsing too. Now it barely costs 10% as much to ship a truck as it did at the beginning of the year.

It’s a “descent into Hell,” says Michael Bloomberg himself, describing what waits for the next U.S. president.

*** So, you see, dear reader, what MUST happen DOES happen. Sometime it takes longer than you expect. And often it doesn’t happen exactly the way you expect. But it is a relief to know that gravity still works…what goes up still comes down. ‘Regression to the mean’ is another old law still in force; when things become extraordinary, you can bet they will go back to normal sooner or later.

But what does this mean for stocks? And what about gold? The dollar?

Hey, you’re asking a lot from a free publication. But what the heck…we’ll make some guesses and remind the reader that he is likely to get no more than he paid for:

Stocks typically regress to the mean, along with everything else. The ‘mean,’ depending on how you measure it, would put the Dow between 6,000 and 9,000. But Mr. Market is can be a devilish fellow. He usually causes stock prices to regress beyond the mean, before he lets go of them. This could take the Dow down to 5,000…perhaps to 3,000…before it finally reaches a bottom.

And before we make guesses about gold and the dollar, we will tell you another thing that MUST happen.

Fish gotta swim. Birds gotta fly. And the feds gotta try to pump more liquidity into the system. All over the world, government officials are taking command of the situation. Well, they are taking command of banks…of trillions of dollars worth of bailout funds…interest rates…and financial rules.

Yesterday, for example, Japan announced that it would spend 5 trillion yen, about $273 billion, in a “stimulus” package. Also, the Bank of Japan told the world that it, too, was cutting rates. This news came as a surprise to us. We didn’t think Japan had any rates left to cut. But the BOJ nevertheless announced that it would shave the short stump of its main rate down to 0.3% and that henceforth it would make commercial loans at 0.5%.

By contrast, the U.S. Fed still has 100 basis points to work with. And the U.S. Congress is said to be planning another stimulus package of its own – surely wrapped in bright Christmas paper. The price tag might be another $400 billion, according to our sources.

Not only are the feds trying to bail out the U.S. economy, they’re also lending $120 billion to a group of foreign countries in order to help them swap their currencies for dollars. At least, that’s what it says in the paper…the actual transaction is a mystery to us.

The Russians are bailing out their own rich people. At least they’ve got some real money to work with – a fund of $200 billion. And the IMF has pledged to lend $100 billion to wherever it is needed.

You can also count on more rate cuts…trillion-dollar deficits…show trials…giveaways…and grandstanding. There will no doubt also be a “jubilee” movement – demanding forgiveness of debt.

The big questions are when and how will these things affect the feds’ ability to borrow? We don’t know the answer…but we have watched Treasury yields rising ominously over the last few days. That could be a sign that the worst is over for the economy. Or, it could be a sign that lenders are worried about US public finances.

If the world economy continues to weaken…and turns into the FWD (First World Depression), as we think it will…none of these measures will do any good. Finally, the U.S. government will run out of credit, out of money, out of time, and out of luck.

Then, the Bank of Ben Bernanke will do what it has promised to do: it will print money. And when that happens…or even when investors begin to suspect that it might happen…the dollar will collapse and gold will rise.

*** “Here’s my question,” begins a Dear Reader. “If in any business deal someone loses or spends money and then someone makes money on the other end of the deal, my question is where did all of the money go? Who is holding on to it? Why? I don’t understand the concept of a global recession. Please help. Thanks.”

*** Another reader answers the question:

“I feel terrible. I feel like this thing has taken 10 years off my life. I took your advice. I think. I put half my assets in cash and gold. Okay…gold went down, but not catastrophically, so I’m okay there. But the other half, I put into stocks. Not US stocks. I bought India and Japan and some other foreign markets that I believe you had mentioned. Maybe over the very long run, those stocks will prove to be good buys. I don’t know. But I’m down about 50% in those investments…meaning, I’ve lost 25% of my wealth.

“Where did it go? It just disappeared. Nobody made any money on the other side of the trade. Because I didn’t sell. I held on, thinking that the bottom was in each time they went down. But they just continued to sink. I still have them. And now I’m afraid they could go down another 50%…but I’m so far down already I don’t care.

“I’m a big boy…I don’t mind the loss of money so much. But I can’t stop thinking that this money I made over the course of a 40-year career in business. It didn’t come from speculation. It’s not easy-come, easy-go money, in other words. Instead, it’s a quarter of the wealth I’ve accumulated over 4 decades of work. So, it’s as if an entire decade of my life had been lost.”

Bill Bonner
for 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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7 Comments on "Consumer Spending Falls Hard As Consumers Guard Their Wallets"

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Nice article


Whoever win or lose, when the game is over, all things goes back into the box. Live our live with an eternal perspective. Be content and keep our focus on the true prize of victory!

Could someone PLEASE answer me as I haven’t been able to find the answer to this question? I really really really want to buy into this idea of holding gold. But one question keeps tripping me. I heard that there are more paper gold (stocks, derivatives, EFTs, futures, and so on) than the physical gold. So unless you hold the physical gold (which makes no economic sense because one tends to buy at high price and sell at low price), your paper claim to gold will become meaningless in the event that the US$ crashes. Is this true? What would… Read more »
rick e

When you are 1 step ahead of the markets you are a genius

When you are 2 steps ahead of the markets …….

This is what happens… “(I’m a big boy…I don’t mind the loss of money so much)” by bill

This is why the DR is the real deal


I was out shopping in some national chain stores this weekend in Arizona. The stores were absolutely packed and people were buying. This isn’t scientific, but if my observations mean anything, the 94% of Americans who are gainfully employed are shopping. We had news that the Holloween shopping numbers were in and were outstanding. The U.S. government bailout of the housing and banking industry could produce a boon to the national budget. I came across a good source of information on the financial bailout here…

ralph hill

“It’s a “descent into Hell,” says Michael Bloomberg…”

“The billionaire and potential independent presidential candidate also said the nation “has a balance sheet that’s starting to look more and more like a third-world country.” FEB 15, 2008

“Bill Gates and Mayor Michael R. Bloomberg announced on Wednesday that they would spend $500 million to stop people around the world from smoking…” NOV 3, 2008

How about another couple of trillion to keep wall street from going up in smoke ? As, if that’s enough to keep the champange and cocaine flowing.

And we have Martin Wolfe in the Financial Times calling for a new Bretton Woods, sneering at the surplus countries, and holding Keynes up as an oracle no less. Well bring it on Martin…. and bring your “free trading” mate Zoellick (Mr ex US customs protectionist and later US bilateral trade negotiator attack dog). Martin is getting all flustered because New York and London bank and finance house balance sheets finally look like getting regulated on a raw leverage basis. And if that happens there is a certain capital problem for these financial centres. How can we can we annex… Read more »
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