When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was.
To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn’t enough oil in the world to allow US-style consumption for everyone.
Two weeks ago, Dubai gave us another wake-up call. Thought to be risk- free, since it was implicitly backed by all the oil in the Middle East, Dubai World nevertheless stopped paying its debts. And this week yet another bell banged our eyes open. Greece announced first that it would not try to reduce its deficits…then, that it would. Hearing the news, the financial world rolled over and went back to sleep. But The Wall Street Journal offered a hint of trouble to come: “Markets force Greek promise to slash deficit,” said its page one headline.
If markets could force the Greeks to trim their deficit – about 13% of GDP…not far from the US level – could they not force Britain and America too? Coming right to the point, the fixers face not just one crisis, but many. They have a growth model that no longer works. They have aging populations and social welfare obligations that can’t be met. They have limits on available resources, including the most basic ones – land, water, and energy. They have a money system headed for a crack-up, and an economic theory that was only effective when it wasn’t necessary. Now that it is needed, the Keynesian fix is useless. If a recovery depends on borrowed money, what do you do when lenders won’t give you any?
But let us backtrack to a smaller insight. Then we will stretch for a bigger one. Americans are supposed to be insatiable shoppers. For at least three decades, the world counted on it. It was the growth model for almost all the Asian manufacturing economies…and for resource producers everywhere. But as we approach the biggest shopping season of the year, a survey of consumers signals an earthquake. Americans plan to spend an average of 15% less during this holiday season than the year before. Only 35% say they will take advantage of post-Christmas sales, traditionally when the stores unload unwanted inventory. They seem to be satiable after all.
Push come to shove, Americans react like everyone else. Now, they are being shoved into a new world, very different from the one they have come to know. In 1973, the American working stiff went into a decline. His weekly earnings, in real terms, went down for the next 36 years. The typical worker earned the equivalent of $325 a week in 1973…adjusted to constant 1982 dollars. By US official accounting he was down to $275 a week in 2009. Unofficial estimates put the loss as high as two-thirds of his purchasing power.
Yet, his spending increased anyway. How? He squeezed the rest of the world. The US trade gap began to go seriously negative in 1992. By 2006-2007, foreigners were shipping to America nearly $900 billion more per year in goods and services than they received in exchange. This gave the typical American a standard of living few people could afford; too bad, he wasn’t one of them.
Now he’s up against billions of Patels and Hus. They work for less. They save more. They want more stuff too. And they’re suspicious of the dollar.
Their economies are growing faster…and better. Because they don’t have 50 years of accumulated success on their backs. That’s the trouble with success; it adds weight. In their heyday, the mature economies could afford to squander and regulate. But that trend, too, is reaching its limits. Even without the cost of ‘stimulus,’ practically all the world’s leading economies are headed for insolvency. And yet, this week, Paul Krugman gave his solution to the weak results from stimulus spending so far – add $2 trillion more!
All of a sudden, the most reliable givens of the past half a century aren’t given any more. Americans were the big winners of the post-WWII period. They got used to it. At first, they wanted to make things; later they just wanted to have them. And with the benefit of cheap oil and resources, and then cheap labor and cheap credit, they were able to get more stuff than any race ever had. Now they are shackled to it, unable to move forward or to back up.
Meanwhile, Europe – led by post-war neoclassical Jacques Rueff in France and Ludwig Erhard in Germany – pursued a different course. While Americans subsidized consumption, Europe taxed it. Credit was expensive, not cheap. And then, the European Central Bank had the great advantage of having a chief banker whom no one paid any attention to. He might talk about stimulating consumption, but he did nothing.
And now the world is reckoning with much more than a consumer debt bubble. It is reckoning with a depression on wheels…the end of the consumer spending era. We don’t know what kind of world will take its place. But it won’t be the one the feds are trying so desperately to save.
Until next time,
for Markets and Money