|
|
It is astounding how many
economists, government officials, and Wall Street strategists construe the
current economic conditions as evidence of a bona fide recovery. It is a
testament to the power of the rose colored glasses handed out by our nation's
leading universities that such a feeling could be widely held despite the
clear and present danger that compounds daily. The myopia leads us to enact
policies that actually exacerbate our problems. The "remedies" are
postponing, perhaps indefinitely, a true recovery.
The oracles who have described the nature of this imminent recovery do so
based on their conviction that consumer spending is slowly returning to
levels that existed prior to the recession. New data released today seems to
support this view, with consumer spending up 0.5% in January.
However, missing from their analysis is any plausible explanation as to why
consumers will be able to sustain such spending given the plunge in income
and credit, and the lack of available savings. In fact, the same January
spending report showed that personal income increased by only 0.1%, while the
savings rate slowed to the smallest since 2008.
I would challenge those who fantasize about a consumer-led recovery to
describe where the spending money will come from. Most consumers are
tapped out, millions are unemployed, and home equity has been wiped
out. The only reasonable thing for them to do is to pay down debt and
sock away as much money as possible to rebuild their savings.
Beyond the question of "how" the spending could be achieved, is the
deeper question of "why" such activity should be sought at all. Excessive
spending, fueled by an insane housing bubble and catalyzed by reckless
monetary and fiscal policy, was the reason that our current recession became
unavoidable. Why would we want to go down that road again?
During the run up to the crash, excess spending had created economic
distortions that have yet to be resolved. Too many resources, including
land, labor, and capital, were devoted to servicing an unsustainable economic
model in which Americans borrowed money to buy homes, products and services
they really could not afford. In many cases consumer behavior was
influenced by overly optimistic assumptions regarding real estate related
riches.
However, now that the real estate bubble has burst, Americans are coming to
terms with a more sober reality. Many have cut up their credit cards,
dramatically reduced their spending, and have squirreled away as much money
as they can. This change in behavior should necessitate a dramatic shift in
the labor market as workers move away from jobs associated with consumer
spending and toward jobs associated with real production, primarily for
exportable goods.
The real problem is that monetary and fiscal policy designed to re-inflate
the burst spending bubble is preventing this transition from taking
place. As a result we are not creating the jobs we need to replace - the
ones we have lost in mortgage servicing, home improvement, and real estate
sales (which we never really needed to begin with). As these jobless remain
unable to find alternative employment, our economy will continue to languish.
Some will argue that the new jobs created by government stimulus spending
will provide the additional purchasing power necessary to revitalize consumer
spending. There are two problems with this expectation. First,
those jobs being "created" by the government are outnumbered by
those being destroyed by government domination of resources. Second, even if it were possible
for job growth to return, having hopefully learned from their mistakes,
workers will be far more frugal with their paychecks than they were in the
past.
Others hope that rising real estate prices will give consumers more confidence
to spend. The reality is that housing prices are still too high and
will likely fall further. But even if they did rise, consumers will still be
reluctant to resume their shopping spree. Home equity extraction loans,
which just a few years ago turned houses into ATMs, are now much harder to
come by. When it comes to spending, it's not just about confidence; it's
about cash.
The only possible way consumers can spend is if the government gives them the
money. However, since the government cannot legitimately give money to
one American without first taking it from another, the most likely means of
doling out cash will be to run it off the printing presses.
That, in a nutshell, is our government's plan for economic recovery.
Print a bunch of money and give it to consumers to spend. This is not a
plan for recovery but a recipe for disaster. Those betting that this
program can succeed in putting together a healthy and sustainable economy
simply do not understand the nature of their wager. The smart money is
going the other way.
For a more in-depth analysis of
how the weaknesses in the U.S. economy could threaten dollar-based
investments, subscribe to The Global Investor, Peter Schiff's free
online newsletter. Click here for more information.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the tenuous position of
the American economy, the housing and mortgage markets, and U.S. dollar
denominated investments, read my new book : The Little
Book of Bull Moves in Bear Markets" (Wiley, 2008).
More importantly take action to protect your
wealth and preserve your purchasing power before it’s too late. Protect
your wealth and preserve your purchasing power before it’s too late.
Discover the best way to buy gold at www.goldyoucanfold.com
, download my free research report on the powerful case for investing in
foreign equities available at www.researchreportone.com
, and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
|
|
