http://market-ticker.denninger.net/archives/1313-Economic-Bottom-Calls-Willful-Ignorance.html Mr. Denninger hits the nail on the head & explains why this "rally" is going to fail.
Absent that turn-around the only paths forward are to either dramatically increase taxes (which will hammer consumption and thus stocks) or force repatriation of labor so we produce more (which will lead to nasty tariff wars ala The Great Depression.) Attempting more and more fiscal stimulus to prop up a consumer with no more true borrowing or production capacity is a path that will produce "feel good" response only for the duration of the spending, the ability of the government to continue down that path is not indefinite in duration. ................................................................... The last paragraph is most likely....but certainly does not offer a proper solution.... Beating a dead horse.... 10/5 C tax only Elimination of legal largesse Massive reduction in govt.... These can be done with ink and paper.... And will "unleash" the US out of the current predicament.... But this will not happen with the current set of politiCONs....
Yes, I like his relentless clarity too.. thanks for posting that... HAVE STOP <img src="http://www.enflow.com/p.gif"> WILL TRADE
Yo Lib'... I have always been in agreement with you about the 10/5 tax... so please run this buy the Ticker Guy and see what he says... thanks...
Just out of curiosity I decided to look at how consumer spending breaks down. The most recent data is from 2007, but if you look at how much is spent and on what, you'll see that at least 50% of what people spend is not what you would call "discretionary". see http://www.bls.gov/cex/2007/Standard/cusize.pdf Food, housing, transportation, clothing and medical come to about 70% of spending. If you look at the categories more closely and strip out things that aren't necessities (like furniture), you still get something around 55-60%. Granted, households will probably change how much they allocate to certain types of purchases, but the fact remains that the majority of spending is not going to respond abstractions like average household credit. You can buy generic corn flakes and cheap gas, but you'll still be buying corn flakes and gas. I think a lot of people are under the impression that it's all jet ski's and trips to Vegas. So while truly discretionary purchases might be scaled back, even they won't be eliminated and that still leaves you with the other 50-70% of spending that isn't very elastic. I think way too much is being read into some fairly esoteric numbers that aren't going to much of an influence on how much people spend.
Xenix, It isn't so much of "what" people have been purchasing with credit, it is more the fact that they HAVE been using credit. Every penny spent whether on credit or from income is a component of the GDP. People have hit a wall, they are maxed out & do not have the ability/desire to add additional debt. They can't use their home equity to "pay off" revolving debt. Credit card companies are lowering limits. Millions have lost their ability to borrow by defaulting on loans. Others are just getting smart and not using credit at all. The trillions in outstanding revolving debt is "pulled forward income" regardless of what it is spent on. Are you saying that the article is inaccurate? If revolving credit is removed from our economy it will not be the same economy we had back in 2005.
So you "only" pull one or two trillion out of GDP, that's still quite a large percentage, like depression numbers. Plus a lot of people are not even spending on the essentials since they have lost their jobs and homes.
The point is that spending is not as elastic as one might think. I'm not saying that deleveraging will have NO effect. I'm saying that quantitatively, the magnitude of the effect is subject to debate. Also, let's not forget that investment is between 15 and 20% of GDP. So when the savings rate goes up, it's not as if that money is being picked out of the economy's pocket. Of course the response to that is that it's not savings or investment if you're paying down debt. But again, that money isn't just disappearing. It's going into the pockets of the people who made all that leverage possible, and they're going to take that money and do what with it? Toss it on the barbie? Uhhh, I don't think so. It will go back into the economy as investment and hence will contribute to GDP.
What portion of the deleveraging process is default? That money is effectivly "thrown on the barbie". The point is that further growth in GDP is dependent upon increased credit. Real wages have not been increasing enough to grow our economy.
Here is the definition of GDP You don't see an entry for debt anywhere in there. It is only indirectly related to GDP through the other components. Will decreased leverage mean less consumption? Barring any sudden change in a relevant factor such as productivity, yes, definitely. But the point is, BY HOW MUCH? Anyone who is going to claim they know the answer to that question with any certainty is lying or misguided. There are too many variables involved before you can pin such things down beyond a wild guess. For example, if we have deflation, people can spend the same amount or less and the 'C' component MAY NOT be affected by a significant amount in real dollars. Increases in 'G' will offset decreases in 'C'. An increase in the velocity of money will result in more more money and a higher GDP. The list goes on. My objection is to the fact that a few relevant facts are taken completely out of context. What is more, somehow the leap is then made to a virtually apocalyptic vision of the future. That particular scenario is within the realm of possibility, but to speak as if it where a virtual certainty disserves the interests of people who look to you for guidance.