No Hope for a Consumer-Driven Economic Recovery

The Great Correction intensifies…

The Dow rose on Friday. The dollar fell. Gold is back over $1,400. And the euro – the world’s most despised currency – is back over $1.40.

A chart circulates, supposedly proving that GDP is now back to where it was in ’07, after falling only 4% in the downturn.

We don’t believe it; they’ve juked and jived the figures.

None of the key components of US GDP have recovered. Housing starts, for example, are running at a million less than they were before the crisis began. Employment is back to the levels it was at 10 years ago – with 7 million fewer jobs than in 2007! Retail sales are going up – but they are still not at the level they were in ’06 or ’07.

So how could the overall economy recover, while the most important parts of it do not?

The real answer: the economy hasn’t recovered. And the Great Correction hasn’t gone away. Instead, the correction is like a hurricane sitting just off the coast. It took a swipe at land, and now, it’s back out at sea; its winds are picking up speed. It’s getting larger…stronger… It’s intensifying.


As we’ve said too many times, none of the problems that led to the crisis of ’07-’09 were corrected. Instead, they were twisted into awful new shapes. They’re still there – swirling around, worse than ever.

Approximately 73% of the economy comes from consumer shopping. So, in order for the economy to grow, consumers have to be able to shop, right? But how can they?

Properly adjusted for inflation, the average wage is lower today than it was in 1973. That’s right, almost 40 years of going nowhere.

Well, hold on…we know what you’re thinking: “What are you talking about? There were some great years for the US economy between ’73 and ’07.”

And you’re right. But they didn’t come from solid, real growth in consumer purchasing power. Instead, they came from two sources:

First, consumers borrowed more. Total debt went from about 150% of GDP to over 370%. The financial industry went wild, sending our credit cards to dogs and dead people…lending money to people without jobs or income…writing mortgage contracts with built-in fuses.

This was not healthy growth. It was not sustainable. It just took “growth” from the future and moved it forward. Want to know why the housing industry builds so few houses today? Easy. It already built today’s houses yesterday. Why is a credit-fueled boom not sustainable? It’s because credit markets go up and down, just like all other markets. When credit is cheaper, people borrow more and buy more. When credit becomes more expensive, they have to pay down their loans and stop buying so much.

Second, during the period ’74 to ’07 more people worked longer hours. The whole family went to work; not just the head of the household. And they worked more hours. This was proclaimed as a great era for women. They went to college. They got jobs. And they had families too. Now, they no longer supplement their husband’s salary. They’ve become equal partners in the household…often, senior partners. The lucky ladies; they get to work two jobs now – one at the office and another one at home!

Up until 2007, the feds could counteract every attempted correction by making more credit available at lower prices. But by 2006, the credit machine no longer worked. The private sector economy was saturated with debt. It couldn’t take any more.

Only the feds could still borrow freely – which they did. In ’09 and ’10, the US government borrowed ALL America’s savings – and then some. Since November of ’10, the Fed has simply been printing money – enough to cover 109% of the government’s borrowing needs during that period.

For the most part, households still can’t borrow…and don’t want to. Unless they are borrowing from the government. All the recent increase in consumer credit, for example, can be explained by the increase in student loans.

Consumers are in no position to borrow…and no position to drive a real recovery. They’re still nailing up plywood over the windows and moving the furniture to the second floor. They don’t have jobs. They don’t have credit. And their houses – which they might have borrowed against – are still sinking below the waterline.

Oh yes, the next big surge of ARM resets, recasts and defaults begins next month.

Pity the poor lumpenconsumer. He was in such a hurry to consume in the bubble years. Now he can’t consume at all. His income is stagnant. His net worth is falling.

And if that weren’t bad enough. The poor consumer’s costs are rising.

Take a look at this report from CNBC:

Cost of Living Hits Record, Passing Pre-Crisis High

One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while …

A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely- watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.

The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed’s preferred measure, CPI excluding food and energy, increased by just 0.2 percent.

Bottom line: The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.

And more thoughts…

We listen to CNN in Spanish, trying to improve our Spanish while driving to work. At first, we barely understood one word in 10. Now, we’re probably at one in 4.

This morning, we thought we heard the following story.

Researchers asked rich people how much money they needed to be rich. A million dollars didn’t get you very far in the eyes of these rich people. They said you needed $7.5 million, minimum.

Why so much? How much does it cost to live well?

Well, it depends. When we began our career, we worked for $100 a week. That became $100 a day after a few years. And then, it became $100 an hour. And so on. We don’t recall being any less happy at $100 a week than we were at $100 an hour. And today, we would readily trade: make us 25 years old again…and we’ll work for, well, $100 a day.

But as our income rose with our years; so did our expenses. At about $40,000 a year, we bought our first new automobile – a Datsun pickup truck. At $100,000 we had a Volvo and a Ford pickup. And a farm in the country. Every increase in earnings came with a price tag attached. Whenever we thought we were getting ahead, we found some new necessity…something we had to have.

That is why so many people with high incomes have no money. As soon as they get a raise, an entrepreneur offers them something they can’t live without.

In our experience, you can live “as though” you were rich on, say, $350,000 per year. That’s about what two good lawyers…or doctors…or small business people…might earn, together. They pool their earnings. They can enjoy “the good life.” Vacations. A nice house. Nice cars. All the gadgets.

But wait, if you could get a steady rate of return of 3% on your money, that would require $11.5 million in capital. And if you had $11.5 million in real capital, most people would agree – you would be among “the rich.” But you can’t BOTH live off $350,000…as though you were rich…and also accumulate enough money to really BE rich – not unless you’re earning a lot more.

If you only had $7.5 million, for example, at 3% yield, you could only expect income of $215,000. That may seem like a lot of money, but it is hardly the kind of money that would give you and your family a lavish lifestyle. After taxes, health insurance, tuition, autos, mortgage payments, and other real necessities, there wouldn’t be that much left. Wealthy? Yes. Rich, not quite.

But even putting together $7.5 million requires a bit of luck. We’ve been meaning to explain a concept we developed many years ago. It’s called “Financial Escape Velocity.” It describes what has to happen in order for you to build up any serious money.

The general problem is the one we mentioned above. Your cost of living tends to go up with your income. Wants and needs rise to meet the income available to them; that is a financial law as rigorously enforced as the Law of Diminishing Returns or the Law of Supply and Demand. That’s why it’s so hard to be rich and get rich at the same time.

The way to beat this phenomenon is either to exercise remarkable self- control…or to outrun your wants and needs with “escape velocity” wealth. That is, wealth that rockets up so fast, you can’t shop fast enough to keep up with it.

Typically, people reach “financial escape velocity” when their wealth surprises them. A family may own a farm or an apartment building. The asset is not very exciting, so they forget about it. And then, one day, they wake up to the fact that it is in the path of a major development, and they are being offered far more than they expected for it.

Another way to reach financial escape velocity is by using the miracle of compound interest. You make a small investment. You add to it. You keep at it.

Compounding works its magic. After a few years, you may notice that your wealth has raced ahead of your expenses. If you are lucky…you will be able to hide the fact from the rest of the family…allowing the compounding more time to reach escape velocity. Imagine, for example, that you have an account that has grown to $2 million, compounding at 10% per year (just to keep the math easy). You will earn $200,000 from the account this year. If you take it out and spend it…the compounding effect will stop. You’ll have $200,000 to spend. But your wealth will cease to grow. And your family will have a chance to bring its spending habits up to the level of your income. Better to say nothing and let it run. After another 5 years you’d have $3.2 million – giving you more than 50% more income.

Another place compounding works is in business. Often, businesses reflect the kind of compound growth you might otherwise get from an investment – only, it is less obvious. Accumulated effort compounds like dollars and cents. Work, capital investment, growing expertise and a little luck is a great combination. Earnings can creep up on you. One year, your business earns $100,000. Ten years later, it earns $1 million. And if you’ve been putting your earnings back into the business, you would not have gotten accustomed to spending more and more. Your spending wouldn’t have kept up.

If you had taken your earnings out, the business would have been unlikely to grow. Instead, your expenses would have grown, making it even harder to ever build up any real capital.

But let the business grow, and one day you could realize that you’ve reached the point where your earnings and capital can grow faster than your expenses – financial escape velocity.

And when that happens, best to keep it to yourself.


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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2 Comments on "No Hope for a Consumer-Driven Economic Recovery"

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Here is one for watchers of the real economy. The Shanghai Containerised Freight Index and the Shanghai Coastal Freight Index (bulk raw materials or in otherwords inputs). Asia – Europe is smashed while Asia – US is holding up. Behind the figures a note of caution, supply problems (too much capacity) on Asia-Europe is compounded because the largest ships deployed 5-10 years ago have been usurped by ships a third bigger but they can’t be used in other trades because they are too big for port facilities (incl US west coast).


And here is the Baltic Exchange now at a turning point.

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