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alstry (35.76)

It is the Consumer IDIOT!!!!!

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February 21, 2008 – Comments (10)

In the past seven years, never has our economy been so dependant on consumerism.  Especially in the area of home purchases/speculation and related purchases.  And when the consumer did not have enough savings to support the habbit, our lending institutions were more than happy to loan out practically infinite amounts to create a boom like none we have seen before.

Consumers, flush with trillions of newly minted cash, purchased houses, vacation properties, furniture, restaurant meals, cars and SUVs, furniture, knick knacks, and lots and lots of financial instruments.

Big Box Stores opened everywhere to supply the habbit.  Loan outlets opened on practically every corner and every strip mall to keep the engine fueled.  Profits went out of this world.  Wages didn't go up and we really weren't producing much, but it didn't matter, we kept loaning and loaning and kept growing and growing. 

Governments went nuts.  Revenues started pouring in from higher sales taxes and property taxes and income taxes.  Not content with simply spending their higher revenue streams, government issued trillions and trillions more in new deb fueling the bubble even furthert.

Money was sloshing around everywhere.  The growth was never going to end, until people finally realized they couldn't afford their higher monthly expenses with stagnant wages.  Whooops.

Defaults started.  Then banks stopped lending so freely.  People started cutting back.  Stores started closing.  State revenues started slowing.  Homes started getting foreclosed.  Commercial vacancies started rising.  Banks started becoming financially constrained.  Lending slowed even further and this is just the beginning.

Becareful when people try to compare this to 1990 Japan where RE values dropped as much as 80%.  In 1990's Japan, its consumers had relatively little debt and its economy was EXPORT based.  Not only that, Japan was not spending trillions on foreign entanglements.

2008 America is much more dependant on the consumer than 1990s Japan.  2008 American Consumer is much more leveraged than his Japanese counterpart.  As the economy contracts, the only thing not contracting is debt.  How do you suppose we are going to pay off trillions and trillions in debt now that consumers are not being loaned money to rush out and buy granite countertops?

10 Comments – Post Your Own

#1) On February 21, 2008 at 2:20 PM, EScroogeJr (< 20) wrote:

"How do you suppose we are going to pay off trillions and trillions in debt now that consumers are not being loaned money to rush out and buy granite countertops?"

Inflation. 

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#2) On February 21, 2008 at 4:43 PM, mickeyc21 (31.09) wrote:

Alstry I feel your frustration. It's like a forest fire is approaching and nobody else sees it.

Escrooge inflation will be a huge influence. I did a presentation last week which showed the effect of a 7% inflation rate (what I believe we currently have) and the other party said "but if my house sells for 500k in five years I haven't lost any real money - that's what I paid for it" Wow! This was AFTER the presentation.

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#3) On February 21, 2008 at 5:16 PM, alstry (35.76) wrote:

Inflation?

You are kidding right?  Wages are being surpressed by foreign competition around the world.  If we inflate prices but keep wages stagnant, the country will not be able to buy much.

Are we going to inflate wages around the world simply to make up for American inflation?

The bubble was huge, popping it will not be fun.

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#4) On February 21, 2008 at 5:56 PM, alstry (35.76) wrote:

Inflation?

You are kidding right?  Wages are being surpressed by foreign competition around the world.  If we inflate prices but keep wages stagnant, the country will not be able to buy much.

Are we going to inflate wages around the world simply to make up for American inflation?

The bubble was huge, popping it will not be fun.

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#5) On February 21, 2008 at 6:16 PM, MakeItSeven (32.89) wrote:

Honest inflation will increase the SS benefit and bankrupt the US sooner.

It has to be dishonest inflation, as in the last few years.  Inflation goes up (when considering precious metals, foods, and commotities) but the US government will admit it with the core CPI.

But, people are not stupid.  It's hard to auction US bonds now and that led to higher mortgage interest rates recently despite the Fed rate cuts.   If interest increases then debt will increase since more money will be used to pay for interests.

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#6) On February 21, 2008 at 7:21 PM, EScroogeJr (< 20) wrote:

"Honest inflation will increase the SS benefit and bankrupt the US sooner."

Hmm, if you count inflation honestly, SS grows proportionally to the nominal GDP, which does not rob recipients and does not bancrupt the government. However, there is 2 trn of public debt held by foreigners, and the government will rob them with glee. Also, there are some Americans who are stupid enough to have savings in the bank, and you can bet the government will be greatful to these individuals for helping finance the homeowner bailout. Also, people are stupid. There is always a time lag between inflation and response to inflation, which should give the government enough time to print tons of worthless paper and still borrow at 4% interest. And, last but not least, what makes you think they're going to count inflation honestly?

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#7) On February 21, 2008 at 8:44 PM, StatsGeek (29.95) wrote:

Here's a take on the inflation vs. deflation debate that I agree with:

http://www.safehaven.com/article-9527.htm 

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#8) On February 21, 2008 at 11:21 PM, AnomaLee (29.21) wrote:

Links4Lazies to the good article posted by StatsGeek: The Future of Investing: The National Debt, Social Security, and Medicare All Point Toward More Inflation

I stand beside the comments of MakeItSeven and EScrooge. In 2005 & 2006 I am willing to bet that 90% of the complainees today were not complaining. Most probably weren't even aware that there was any ensuing contraction ahead. Unfortunately,  everyone fears and cries when the cycles of expansion and contraction, but they happen and they're part of society and they're part of our lives.

Alstry, you can't even use 1990 Japan as a comparison to today's situation. You have to put history into perspective before making that comparison. Japanese assets were still so over-valued in 1990 to an extent that U.S. real estate prices of today don't even compare. In regards to the Japanese & their higher rate of savings your statement is true of Japanese households, but it's completely inaccurate of Japanese banks and corporations. 

Using 1990 Japan is probably worse than using 1929 America as a comparison to today. Japan traded the two year experience of a "Great Depression" and traded it for the story of Japan's "lost decade" and 0% interest rates trying to stimulate growth and dampen deflation. Also, the collapse of Japanese assets & their fallen economy fueled another bubble in the world - the carry trade.... Another illustration of the expansion & contraction cycle

This is not the end of the world. However, global growth will slow, and you and other people here need to begin thinking more globally. Things are bad, but the problems facing America ARE NOT domestic. You may need to read more news about the stories of Credit Suisse or Northern Rock and realize that other countries are facing far less desirable solutions than what faces Ambac and MBIA....

U.S. growth slowing to 1% or a possible recession is bad. However, global growth slowing substantially will hurt more when it falls from it's the unsustainable rate it has expanded for much of this decade. Also, the bubble in real estate globally is worse than the dot-com bubble in some places and foreign capital from friendlies flowing to the U.S. will slow, and that is very bad because we're going to take more investments from less preferred nations.

The world will still spin and better things to consider when thinking about what is facing us today is the financial collapse in global economics that happened in 1997, or if you think about the government policies of the past 8 years and what policies could face us going foward and if you recall the stagnant era of the United States between 1967-1983.... 

Just please don't use Japan's collapse.... This isn't the Great Depression... You can still make plenty of money in the stock market today just like you could had made money investing during the Great Depression or investing in Toyota during Japan's collapse.... 

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#9) On February 22, 2008 at 2:42 AM, MakeItSeven (32.89) wrote:

SS grows proportionally to the nominal GDP, which does not rob recipients and does not bancrupt the government.

That's not true.  Here's from the SS website ssa.gov:

Most people are aware that there are annual increases in Social Security benefits to offset the effects of inflation on fixed incomes. These increases, now known as Cost-of-Living Allowances (COLAs), are such an accepted feature of the program that it is difficult to imagine a time when there were no COLAs.

In 1972 legislation the law was changed to provide, beginning in 1975, for automatic annual cost-of-living allowances (i.e., COLAs) based on the annual increase in consumer prices. No longer do beneficiaries have to await a special act of Congress to receive a benefit increase and no longer does inflation drain value from Social Security benefits.

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#10) On February 22, 2008 at 4:56 AM, EScroogeJr (< 20) wrote:

So what? I don't see any catch (except, of course, that the BLS always  underreports the actual increase in consumer prices). Prices double, nominal GDP doubles, SS payments should double if you count honestly, but in reality will increase only 80% due to the efforts of the BLS. Foreign bagholders who bought T-Bills smoke nervously as they see a pack of Marlboro selling for $13.

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