Apr 112015
 April 11, 2015  Posted by at 7:42 am Finance Tagged with: , , , , , ,

Harris&Ewing Inauguration of air mail service, Washington, DC 1918

That title may be a bit much, granted, because never is a very long time. I might instead have said “The American Consumer Won’t Be Back For A Very Long Time”. Still, I simply don’t see any time in the future that would see Americans start spending again at a rate anywhere near what would be required for an economic recovery. Looks pretty infinity and beyond to me.

However, that is by no means a generally accepted point of view in the financial press. There’s reality, and then there’s whatever it is they’re smoking, and never the twain shall meet. Admittedly, my title may be a bit provocative, but in my view not nearly as provocative, if not offensive, as Peter Coy’s at Bloomberg, who named his latest effort “US Consumers Will Open Their Wallets Soon Enough”.

I know, sometimes they make it just too easy to whackamole ’em down and into the ground. But even then, these issues must be addressed time and again until people begin to understand, and quit making the wrong decisions for the wrong reasons. People have a right to know what’s truly happening to their lives, and their societies. And they’re not nearly getting enough of it through the ‘official’ press. So here goes nothing:

US Consumers Will Open Their Wallets Soon Enough

People are constantly exhorted to save, but as soon as they do, economists pop up to complain they aren’t spending enough to keep the economy growing. A new blogger named Ben Bernanke wrote on April 1 that there’s still a “global savings glut.” Two days later the Bureau of Labor Statistics announced the weakest job growth since 2013, which economists quickly attributed to soft consumer spending.

The first problem with Coy’s thesis is that even if people open their wallets, far too many of them will find there’s nothing there. And Bernanke simply doesn’t understand what savings are. His ideas through the past decade+ about a Chinese savings glut were always way off the mark, and his global – or American – savings glut theory is, if possible, even more wrong. In the minds of the world’s Bernankes, there’s no such thing as people opening their wallets to find them empty. If they don’t spend, they must be saving. That there’s a third option, that of not having any dollars to spend, is for all intents and purposes ignored.

The U.S. personal savings rate—5.8% in February—is the highest since 2012. “After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow,” Richard Moody, chief economist at Regions Financial, wrote to clients in March. Saving too much really can be a problem when spending is weak.

The little man inside, when I read things like that, tells me this is nonsense. So I decided to look up how the US personal savings rate is calculated. Turns out, it’s another one of those whacky goal-seeked government numbers. At least, that’s what I make of it. Mainly, though not even exclusively, because of things like this, from a site called Take A Smart Step:

[The personal savings rate in] November 2012 was 3.6%, this is not even close to where we need to be for financial health. This savings rate barely gives us enough to handle emergencies, and makes us as a nation weaker. The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent.

Making paying off your debt (i.e. money you’ve already spent) count towards your savings is a practice fraught with questionable consequences. But useful for economists, and accountants alike, no doubt. The problem with it is that it hides reality behind a veil. Because debt repayments are not really savings at all; people are not free to spend what they put into paying off debt, on something else, like iPads, cars or trinkets. Not even on hookers or crack cocaine, for that matter.

For the vast majority of what is paid off in debt, there’s no such thing as free choices. People pay off debt because they must. Or, to look at it from another, wide lens, angle, Americans would have to stop servicing their debt payments if they want to ‘start spending’ again.

Going through the numbers from various sources, I can see that the US personal savings rate is presently some 5.8% of pre-tax income, and debt repayment is close to 10% of disposable -after tax – income. I’m still trying to make those stats rhyme. But no matter how you read and interpret them, it should be clear that debt repayments are a large part of ‘official’ savings. Even if they really shouldn’t be counted as such.

Of what remains in real savings, retirement/pension savings must necessarily be a substantial percentage, and it would be weird to call those things ‘saving like there is a tomorrow’, if only because they are about, well, tomorrow. But that seems to be the new normal: creating the impression that saving any money at all is somehow detrimental to the economy. A truly crazy notion, if you ask me. Let’s get back to Bloomberg’s Coy:

There are only two things you can do with a dollar, after all: spend it or save it. If you spend it, great—that’s money in someone else’s pocket.

In someone else’s pocket, but no longer in yours. Why would that be so great? It’s only great if that someone has added value to something by doing productive work, not if you simply swap paper assets.

If you save it, the financial system is supposed to recycle your dollar into productive investment with loans for new houses, factories, software, and research and development.

That notion of ‘the financial system is supposed to’ refers to theories such as those that Bernanke and his ilk ‘believe’ in. Theories that have no practical value. What is normal for many everyday Americans is crippling debt levels, and no such thing is recognized in these theories. After all, according to them, whatever amount of dollars you get in, you either spend or save them. And if you use them to pay off previously incurred debt, you’re supposedly actually saving, even though you no longer have possession of the money in any way, shape or sense, nor a choice of what to spend it on.

But if no one’s in the mood to invest more and interest rates are already as low as they can go (as they are in much of the world), the compulsion to save can sap demand and throw people out of work. For the U.S. economy, the good news is that the jump in the personal savings rate is probably no more than a blip. Three economists from Deutsche Bank Securities in New York explained why in a March 25 report called ‘U.S. Consumers: Still Shopping, Not Dropping’. While noting a “deceleration” in consumer spending, they wrote, “we think that concerns about the outlook for the consumer are overstated.” Their model of the U.S. economy predicts the savings rate will fall to 3% to 3.5% by 2017.

Oh sweet lord. Now a falling savings rate has become a beneficial thing, even when and where savings are very low. Not saving will allegedly save the economy. How did that happen? If we may presume that debt repayments will continue virtually unabated, and there seems to be little reason to think otherwise, this means that by 2017 there will be just about nothing saved at all anymore in America. Which means there’d be very little left of the ‘If you save it, the financial system is supposed to recycle your dollar into productive investment’.

The only ‘growth’ perspective America has left is to grow its debt levels continually, continuously and arguably exponentially.

Other economists have also concluded that the spending dropoff is temporary, which is why the slowdown in job growth, to just 126,000 in March, didn’t set off many alarm bells. “Consumer spending is starting to look more and more like a coiled spring,” says Guy Berger, U.S. economist at RBS Securities. One sign that consumers aren’t retrenching: On April 7 the Federal Reserve reported that consumer credit rose $15.5 billion in February, in line with the recent past.

They got deeper into debt, and this is a sign they’re not ‘retrenching’? A coiled spring? Really?

According to Deutsche Bank Securities, the first reason to think consumers will resume spending is that their incomes are rising. Annual growth in average hourly earnings has averaged about 2% since 2010, which isn’t great but does exceed inflation. With more people working as well, aggregate payroll outlays are up 4.9% from the past year, according to Bureau of Labor Statistics data.

The rises in stock and home prices should make consumers more willing to live a little, say the Deutsche Bank authors. They calculate that households’ net worth is almost 6.5 times consumers’ disposable personal income. That’s the highest ratio since before the housing crash.

But that last bit is arguably all due to QE induced asset bubbles. Not an argument the author would make, I know, but nevertheless. Coincidentally, another Bloomberg article published the same day as the one we’re delving in here is called:Why Your Wages Could Be Depressed for a Lot Longer Than You Think. Perhaps the respective authors should have a sit down.

No question, the high savings rate depresses spending in the short run. Purchases of durable goods, from cars to couches, remain well below their 60-year average share of GDP. But all that saving helps consumers get their finances in order, which will allow them to satisfy pent-up demand for that sweet new Ford F-150.

No no no: they just paid off part of their debts. How can that possibly mean they’ll go out and get a new F-150? In real life, they spent their money instead of saving it. Either way, they don’t have it any longer to spend on a F-150. It would mean they need to get into new debt. On top of what they still have left over even AFTER paying down part of it.

Fed data show that financial obligations including debt service, rent, and auto leases are about their lowest in comparison to disposable income since 1981.

Hmm. According to Wikipedia, “Household debt as a % of disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011.” It’s about 105% today. So that’s just a very weird statement. Someone’s wrong, very wrong, and I think I know who that would be. Maybe Peter Coy conveniently ignores mortgage payments when he talks about “financial obligations including debt service, rent, and auto leases”?!

When consumers are ready to borrow more, it won’t hurt that, according to the Fed’s survey of banks’ senior loan officers, banks are easing lending standards.

See? That’s what I said: they can only spend if they acquire new debt. They’re just getting rid of the last batch, and it’s going mighty slowly at that. Lest we forget, when debt as a percentage of income falls, that is due to quite an extent to people failing to make any debt payments at all, and losing their homes and cars. This is a dead economic model. This model is pining for the fjords.

These factors add up to an optimistic consumer.

Oh, c’mon. What is that statement based on? That ‘sky high’ savings rate that is really just poor slobs paying off what they can in debt repayments so they won’t get hit with even more fees and fines?

What I think these factors add up to, is a delusional reporter. There is no excess saving. It’s ludicrous. As far as people have any money at all, they’re using it to pay down their previously incurred debts. And that gets tallied into their savings rate by the government’s creative accounting methods. That’s all there is to the whole story. But it will, regardless, induce a few more poor souls to sign up for more mortgages and car loans and feel like happy American consumers on their way down into the maelstrom.

It’s sad, it really is. Maybe we should first of all stop referring to the American people as ‘consumers’. That might help.

Home Forums The American Consumer Will Never Be Back

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  • #20430

    Harris&Ewing Inauguration of air mail service, Washington, DC 1918 That title may be a bit much, granted, because never is a very long time. I might i
    [See the full post at: The American Consumer Will Never Be Back]


    Now maybe I am confused in all this but I’ve tried sporadically to find out how much of China’s dollar ‘savings’ were sterilized. That is when Chinese companies get paid in dollars they go to the bank and exchange them for RNB. Where did the banks, really the Peoples Bank of China, get those RNB they exchanged for those dollars? Chinese companies don’t have much use for dollars since they pay workers RNB and buy their factories and equipment and supplies with RNB. Were those RNB simply printed (an RNB balance created in a bank account) and exchanged for the dollars which were then kept as reserves or to buy Treasury bonds as they did hand over fist in the 00’s?

    In order to sterilize these transactions the PBoC would need to either buy RNB with dollars on the FX market but that never happened in the past because there was no RNB FX market. Or they could have done an offsetting RNB/Dollar exchange internally with onshore financial institutions. In either case a transaction in order to get the RNB to exchange for the dollars.

    If the former then all those Chinese dollar ‘savings’ that bought a trillion of Treasury bonds or are sitting at the PBoC as reserves were not savings but are simply the result of printing. Printing RNB and buying dollars from Chinese companies with therm. I mean how can a million dollars buy Chinese made lawnmowers and then be turned around and buy a million dollars in 10 year Treasury notes with no other transaction in between that were the source of those RNB since the Chinese lawnmower maker now has XXXXXXX RNB and the PBoC has a million in reserves or Treasury bonds.

    That is in essence, someone correct me if I am wrong, the source of a lot of all those Chinese savings. They printed it. If I am way off in all this I will be happy to be corrected. If not then Greenspan, Bernanke and most everyone else needs to be called out as liars.


    f-150 xl starting at $24,899 (I remember, the price of a 3 bdr rancher was $25,000)
    f-150 platinum starting at $62,499
    MY “build your f-150 package” came to $80,108.
    That amount would have bought me 4 Mazda cars 15 years ago.
    ( Today, It sells, used, for $5,000)
    I don’t know anyone who would have the money to pay cash for a f-150
    In some towns you can buy a condo for $80,000.

    Will F.

    I believe that the smart ones are following your model.

    My foolish friends are still amassing debt like tomorrow will be sunshine and lollipops for everyone, never realizing they have not had a raise in 5 years, nor will they likely get one any time soon. Like many, I believe they have reached the “exhaustion” phase of austerity. They don’t have the mental stamina to live within their means, always wanting to “one-up” the Jones’ or get the latest and greatest thing. When the dollar finally adjusts for what we have done to it, they will be right back where they were in 2008 when they had to give back their homes, cars etc, just to buy food and gas was $4-5 / Gallon.

    I think the smart ones are saving, but like most humans a small percentage are planning for hard times like the fable of the ant and the grasshopper. The remainder are the grasshoppers waiting to freeze or starve if the Gov’t doesn’t come in and take from the Ants to feed them and save them again.

    Whether one side or the other comes out ahead, I guess we will see but I would rather have a car I can fix myself, a little food and fuel saved up and some currency that Uncle Sap doesn’t know about, than a line of credit that it maxed out and a bunch of new stuff that will cost $$$ to fix when it breaks.

    As for the $80K F150. No thanks. They are nice, but I can get from point a to point b in my $10K car just as well, it runs just fine, has airbags and abs, and is paid for.When it breaks I use my $1k car to get the parts to fix it and live on without owing anything to a bank or the Gov’t for the privilege of being in debt.

    As for savings….I don’t have any in a bank since I like to have the ability to do what I want, when I want, not wait for a banker to allow me the pleasure of using my own money at their whim. The real savings in life is passing knowledge on to others and learning to live without the things that drain our energies without returning anything more than depreciation.


    rapier, you’re spot on, they printed it all and then use it not only to buy dollars but also to go buy assets abroad, land, homes, Athens harbors, you name it.

    I’ve called it Monopoly money many times. And that’s all it is. The west is crazy to accept it. Then again, our money too is Monopoly.

    Ken Barrows

    I think savings are measured by the USA is income less consumption. So $5,000 income and paying a monthly debt of $500 for past credit cards is 10% savings.


    Since the American consumer will never be back, and I see no reason to doubt that assessment, the US economy is doomed as well: 70% of GDP comes from that same consumer. Keep that in mind when you read the next batch of ”just around the corner” statements. If and when 70% of GDP depends on people borrowing more than they already have, you’re looking at something that’s beyond repair.


    Some facts about China that ask for a recalibration of our perception of that country:

    – total bank deposits at the end of 2014: approximately 120 Trillion Rmb (approx. 20 Trillion USD)
    – total gold reserve at the end of 2014: 16,000 tons (see https://www.zerohedge.com/news/2015-04-09/spelling-out-big-reset)
    – total home ownership: approximately 90% of all Chinese families own their home (mortgaged homes represent an insignificant percentage of the total)
    – total bank reserves: large commercial banks in China are required to put aside 20 percent of the total deposits they receive as reserve which means that they have the equivalent of some 4 Trillion dollars in reserve
    – total government’s ownership in enterprises (market cap): I know of no reliable figures. But if the state were in urgent need of cash it could easily collect trillions of dollars by selling a stake of its ownership.
    – foreign reserves: 4 Trillion USD
    – money creation: it is in the hands of the state which allows it to create money according to the natural expansion of the economy… by injection in public works.

    How do these factors stack in comparison with the US or the EU?



    “’Foreign owned global corporations account for 60% of Chinese exports to the US.’[1]
    Did you know this? How many people understand that this means that non-Chinese corporations are responsible for the trade imbalance between the US and China.

    Who does know this?

    Not Bernanke and Greenspan who are reported to be blaming the “high-savings countries in East Asia” for “the immense pool of [global] liquidity” (particularly in the US). [2]

    But who is creating this gigantic pool of liquidity? Economist Enzio von Pfeil has pointed to problems with the official [US] Treasury records that detail the owners of US ‘foreign’ debt – “there appear to be no data available on how much U.S. Treasury debt is held by U.S. MNCs”. What, he says, do U.S. MNCs do with at least a portion of all of that money they are making in their fabulously successful overseas operations? [3]

    Not Barry Eichengreen who holds the title of the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, where he has taught since 1987.[2], [4]. He says that “Whether [or not] there is a permanent reduction in global imbalances will depend mainly on decisions taken outside the US, specifically in countries like China.” [2] Well, how can that be? If China, itself, is not responsible for the great outflow of goods to the US? […]

    How important is it to get the facts of world trade right? Is trade between subsidiaries of the same transnational corporations trade at all?”


    Formerly T-Bear

    @ Raleigh reply # 20445

    Not an unexpected fact given labour arbitrage practiced as a financial imperative, it certainly is not an economic imperative. To access the Chinese labour resources, investment in capital resources (e.g. factories, materials and management) is required au priori; your fact reflects that ownership or effective ownership in conjunction with Chinese politically imposed ownership and control. Profits derived flow both to China as well as to their foreign corporate ‘guests’. Corporate accounting takes care of cloaking those flows which never seem to appear in credit to the corporate stockholders but bolster the numbers for upper management renumeration. The school of ledger-desmane – control of the books. That is the world as it is.

    Bertie W.

    Since the American consumer will never be back, and I see no reason to doubt that assessment, the US economy is doomed as well: 70% of GDP comes from that same consumer. Keep that in mind when you read the next batch of ”just around the corner” statements.

    I can only hope the media is not going to subject us to the 1930’s catchphrase, “Prosperity is just around the corner,” in the 2010s. : /

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