Money Sage (archive)

It is way, way too early to form even a provisional judgment on what is, in fact, the most crucially important of all questions for the future, long-term course of the global economy. All we are beginning to see is typical early recession behavior of the American consumer. This has consisted, thus far, in a contraction in the rate of consumer borrowing, declining purchases of houses and durable goods, and contractionary indications in consumer spending for discretionary items. Even a further acceleration in these trends as a downturn unfolds and intensifies would not necessarily constitute a structural change in consumer behavior manifesting any fundamental change in consumer psychology.

Having said this, if the current economic weakening does indeed fulfill its promise of visiting a level of pain on the average American homeowner/worker/consumer which appears rather likely, the enduring consumer psychology of borrow, spend, borrow more, and spend more could begin to come into question. The chances of such a development are enhanced substantially by the unprecedented (post World War II) bear market in house prices, and by the accompanying credit contraction. Much will depend upon the DURATION AND FUTURE SEVERITY of these trends.

The consumer psychology of the past six decades could reach an inflection point if the tightening pressure on disposable income, debt service, and the optimism/pessimism balance of consumer psychology about future economic prospects were to shift significantly. Much will depend upon the effectiveness of the FED's rescue effort, on the scope and timeliness of US government bailout efforts vis-a-vis the banking system and the American homeowner, the prudence/greed equation of the Saudis, and the true resiliency of the American economic and financial systems when put to a test unlike any we have seen in the post World War II era.

An early clue to whether or not a fundamental shift in consumer psychology may be beginning will come this spring/summer when the tax rebate checks arrive. Historically, the American consumer -- especially those outside the wealthy class -- have spent, and spent quickly, their rebates. Today, pressed by an extraordinary decline in house prices and the poverty effect and fear of the future to which this bear market may be expected to give rise, by the shrinking of house equity and other previously available sources of ready credit, by the extremely high REAL cost of credit (22% credit cards translate into 20% real rates, a price sufficient to bankrupt a Buffett), and by punitive prices for essential energy and food, the six-decade old spend and borrow psychology of the American consumer is under unprecedented assault.

The implications for a signficant change in the psychology and derivative spending/borrowing habits of the American consumer would be PROFOUND, not only for America, but for the entire world. Despite the verbal and print and media bombardment to which we have been subjected about the shift in the global economic balance of power to Chindia, the rise of new, autonomous centers of economic/financial power in the person of Russia, the Middle Eastern oil producers, and other newly enriched energy exporters, the basic truth remains that China and India are poor countries. Their emerging middle classes are relatively small, and are still in the early emergent stages. The growth of this segment, and their real emergence as an independent source of consumption CONTINUES TO DEPEND UPON THE RECKLESS SPENDING OF THE DEBT-ADDLED AMERICAN CONSUMER. All of this endless Chindia economic growth and infrastructure development being dinned into our ears is rooted in the inflow of capital courtesy of the American consumer of Chindian exports. If this stops, or is significantly curtailed, the consequences for their growth will be dire. They are not only not "decoupled," they are actually more coupled than ever to the American consumer, since Chindia now experiences the famous revolution of rising expectations which can be satisfied one and only one way.

As for Russia, we need to bear in mind that this country has experienced a DRASTIC DEGRADATION in its status, its importance, and its power since the fall of the Soviet Union and the disintegration of the Soviet empire. Yes, it is reviving, but is still but a shadow of its former self. Moreover, Russian growth too depends upon the American, the European, and the Japanese consumer. America is one-quarter of the global economy; Japan is 8-9%. Japanese consumers don't buy much, relatively speaking; Japan's income and wealth depends on exports, to the US and to China and Europe. China's ability to import Japanese goods depends upon the AMERICAN CONSUMER'S ABILITY AND WILLINGNESS to sink ever deeper in debt to finance the purchase of Chinese goods. Europe too is heavily dependent on exports to the U.S., and Japan is dependent on European and American consumer purchases.

As for the principal Middle Eastern oil producing states, they are even more dependent on foreign consumers -- and ultimately, on the American consumer. Moreover, they export only ONE commodity. It is a crucial commodity, to be sure, but a global downturn could produce a substantial drop in demand. If those states which can live without the flow of income produced by the current production/price levels do cut production to prop up prices, it will merely accelerate the economic downturn in the West, and maintain the same degree of pressure on an American consumer INCREASINGLY PRESSED by other forces. If the oil exporters go too far they may learn a lesson they will never forget -- the same lesson Saddam Hussein learned.