Where are the consumers?

If the consumer credit party is over, is it possible for businesses to grow, and prosper? Not now, when consumers stop consuming, the economy stop growing.

If consumers don't borrow, the consumer economy won't grow. Of course this is nonsense: An economy only grows from consumer spending if paid for from real earned money, not from borrowed money. When consumers spend money that they never earned a phony economic boom is triggered. When consumers have to repay their debts, the economy shrinks again. That is the history of the economy during the past decade. Consequently now the economy has to be rebalanced and that’s done by the market itself, and not by the Feds or Central Bankers.

A real economic boom is one that results from increased earnings, not from debt. When people earn more they can spend more - without going further into debt and without having to stop consuming in order to pay back the money they borrowed. Production capacity is adapted to that condition and remains stable.

The New York Times noticed: "Americans stop buying; trade deficit declines" says the headline.
Consumers have to cut back. They are out of time and out of money. Ten years closer to retirement than they were in before the tech stock crash of 2001, Baby Boomers are not a dollar richer. Now, they're facing an economy where housing prices are in decline, jobs are hard to find and lenders are reticent to lend them more money. But if consumers stop spending won't that have repercussions?

The NYT continues: "For the first eight months of the year, the United States trade deficit with China is down by about 14 percent or $20 billion, compared with one year ago. The nation's trade deficit with Japan has shrunk by almost 20 percent, and its deficits with Mexico, Canada and the European Union are down more than 40 percent.

"The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal."

Americans were the world's champion consumers. Just lend them money; they'd spend it. But when they stop spending it brings motionlessness to the entire planet. The malls go quiet, trucks slow down, ships are idled, and finally factories are shut down. Clerks, drivers, harbour workers and assembly line employees all go home. That is what is happening at present and actually shows people what a depression is all about.

The feds are trying to get consumers to spend again. They've given them tax rebates, incentives, loans, and bribes. They've run a federal deficit three times higher than the previous record. They promise $1 trillion deficits "as far as the eye can see." And they put at risk a sum of money equal almost to the entire US GDP. Still those consumers won't consume like they're supposed to. Suddenly, it has become the 'Age of Thrift.'

However according to the news reports, the economy is 'growing' again. But carefully read, what kind of growth this is.

David Rosenberg writes it: "All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush."

But if consumers don’t spend, the feds will do it for them!
“It took the Fed nearly one hundred years to grow its balance sheet - which is the foundation of the US money supply - to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet...to more than $1.8 trillion.”

Early last week, the Fed announced that it would keep the money flow in force. And by the end of the week, the G-20 meeting of finance ministers confirmed by saying they all were sticking with their stimulus programs.

One can't put that much cash into a financial system without getting some kind of reaction. Goldman is making record profits, for example. How does Goldman make money? It is finance business? It makes profit by offering credit? When credit expands, the moneylenders and speculators at Goldman just make more money.

But the private sector isn't borrowing. Consumer credit contracted again in September - the 8th month this year. Unemployment just passed the 10% mark, and The New York Times reports. "Small Businesses Hunker Down to Survive," in another headline story. Conclusion: Responsible Spending Is the "New Normal"

Meanwhile another big bank went bust in California. While the private sector de-leverages, -paying down debt - the public sector expands. Now, it's the feds who are doing the borrowing - about $1.7 trillion this year.