by Tom Paterson{jcomments on}
Last Friday in the US is known as ‘Black Friday’. So called because it’s rumoured that it is the first day that shops go from losing money (in the red) to turning a profit (in the black).
To entice shoppers, retail stores offer discount sales and open their doors before the sun comes up. People form large disorderly queues outside and rush the shop to be the first to get their hands on a ‘bargain’.
Watch this clip to get the idea. People crushing each other just to be the first to get their hands on some foreign made products. I’ve dubbed these people ‘suicide shoppers’. With the Western world on the verge (or already in) bankruptcy, North and South Korea on the brink of all out war, 47m (around 1 in 6) US citizens only managing to eat because they are receiving government food stamps, real US unemployment near 20% and a central bank out of control printing trillions of Weimar-esque dollars, all these suicide shoppers care about is wanton consumerism.
The irony is that by their very actions these suicide shoppers are sealing their own fate. They are running to buy mostly Chinese goods, goods that used to be made in the US, increasing the trade imbalances with the Chinese and ensuring those US manufacturing jobs never return to the US. These actions are guaranteeing their own unemployment.
The problem with just about all Western economies is pretty simple, debt. Huge, un-payable debt. When all the government debt, private debt, corporate debt and unfunded government liabilities (like pensions and healthcare) are added up the total debt for the US, according to Economist Laurence Kotlikoff, is $200 Trillion. In other words for every man and woman with a job in America (a dying breed) they have an effective mortgage to the government of $3.125million each. And this is before you factor in their personal debts like credit cards, car loans and home mortgages. When I say America is bankrupt, I’m really not kidding.
But before those this side of the pond look over at the US with a certain smugness, you might want to take a look at the excellent work that Ben Davies has pulled together at Hinde Capital. He puts the UK total indebtedness (government, unfunded liabilities and private) at around £10trillion, that’s around £345,000 for everyone with a job in the UK. On a personal basis the UK is actually worse than the States. As a percent of disposable income the average UK citizen owes 166%, the US just 130%.
The utterly frustrating thing about this problem is that the mainstream media don’t see the US suicide shopper as the problem, but rather you see headlines heralding the return of the US consumer as a good thing, with statements like:
U.S. consumers will help drive global economic growth
Nothing could be further from the truth, as the suicide shoppers are destroying their own jobs by ensuring manufacturing jobs stay abroad, they are also destroying the entire economy. The very last thing the US economy needs right now is more spending. It was care free spending that got us into this depression so even more is hardly likely to pull us out of it. Rather those media headlines should read; “US economy further hurt, as people buy stuff they don’t need, made in countries they’ve never been to, with money they don’t have”. The US (and the entire Western world) is suffering from a chronic lack of savings not spending.
We should be cheering headlines that read “Savings at an all time high!’. But rather the savings rate in the US has been deteriorating year-on-year from 1980 onwards, and turned negative in 2005/06. This sad story is repeated in the UK, with our savings rate dangerously close to negative since 2007. Simply put you can’t grow the economy without savings. Whilst more recent figures appear a tick up in savings, they are still woefully below just what is needed, and the methodology for the savings rate is a little suspect (look out for a future GMS piece on this topic).
Econ 101 time. Just how do you grow an economy? An economy grows through under-consumption (savings) not over consumption. Over consumption is how you destroy growth.
Think of it like this, you wash up on a desert island; you are the only person in your economy. You need to survive so you go about fishing. You spend all day everyday fishing, and you manage to catch two fish a day. You work out that in order to survive you can get by on just one fish a day. So, you can save (under-consume) one fish you catch per-day. Lets say you do this for a week, by saving (under-consuming) one fish a day, after a week you’ll have 7 fish ‘saved’ up. This allows you to effectively take a week off from your fishing duties, using your now ‘saved’ fish. You can spend time perhaps trying to build a fishing net. During your week off you successfully build that net which now allows you to catch 7 fish a day. Now you only need to fish one day a week leaving you 6 free days to ‘grow’ your personal economy, perhaps to build a shelter or raft to explore the island. Your economy only grew because you saved, had you consumed all your fish everyday you would have been unable to grow your economy.
If you borrow to consume, you basically are having something today, that by definition you can’t have tomorrow. Using the classic Wimpey from Popeye as an example, you borrow a hamburger to eat now, which you have agreed to pay back next week. When next week comes around you have to find a hamburger to pay off your debt (plus interest!). The western world has been doing this for near on 40 years, and the time to forgo that future consumption is today.
Granted, this is a simplistic example, but the economic principal of saving to grow is exactly the same on that desert island as in a modern economy. Sadly this Econ 101 point seems to be missed on most PHD Economists who grace our newspapers and airwaves. Rather than consumers, we need producers; after-all you can only consume what you can produce, and if everyone is consuming then economic growth is destined to fail.
So where did we go wrong? Blame for our backward view, that you can consume your way to growth, that you can spend your way to prosperity and that a problem of too much debt can be fixed by even more debt, should be laid fairly and squarely at the door of the Marriner Eccles building, the Federal Reserve. They are after-all the “Liquefiers of the whole world”.
Central banks in general (including our own BoE) and the Federal Reserve specifically have been busy destroying savings over the past 30 years. Central banks are the cause of the ‘boom and bust’ cycle. The great free-market economist, F.A. Hayek, was awarded the Nobel Prize for Economics in 1974 for work that established the central banks’ role in the business cycle.
In basic terms, whenever the economy has looked like tipping into recession, the Fed/BoE has pumped easy money into the system by slashing interest rates. Forcing cheap money into the system has papered over the underlying problems in the economy caused by mal-investments, debt and a lack of savings. This has kept the party going, but meanwhile the debt, both personal and public has continued to grow.
In 2001 the Nasdaq bubble burst and the US should have experienced a severe recession. The newly elected President Bush didn’t want to deal with a recession on his watch, and the Fed came to his aid, slashing interest rates all the way down to 1%. Rather than purge the economy of the mal-investments, which would have been quite painful, the Fed managed to blow one of the biggest housing bubbles the world had ever seen.
In 2008, the unsustainable housing boom turned into a great fat bust. But again, rather than let the debts in the system be liquidated the Fed this time dropped interest rates all the way down to zero. We can see what damage was done with interest rates at 1% (huge housing boom) in the 00s, the damage caused by 0% will be much, much worse.
The underling problem of too much debt in the system has not been addressed. All debt must be liquidated, and until that happens the chance of a lasting sustainable recovery is impossible. Instead we are just readying ourselves for the mother of all headaches in the not too distant future.
Think of it this way. You’ve been at a house party for a few days now. The house is trashed, you’re beginning to sober up as the sun is coming up and you’re starting to feel lousy. You are about to suffer a terrible, but necessary hangover.
You look around the house and there are empty beer cans everywhere, people have passed-out all over the place, the furniture is smashed. It’s a mess. To top it off the owners of the house (Mr & Mrs Reality) are due back through the door any minute.
What should you do? The sensible course would be try and repair the damage caused by the party as best you can, suffer the hangover, and offer to repay Mr & Mrs Reality for any breakages.
There is one guy at the party (Mr Fed), who seemed like a lot of fun at the start, making sure you had some alcohol in your glass and the music turned up. But now, in the cold light of day and with the onset of a hangover he seems to be cutting a rather pathetic figure. But Mr Fed is busy rushing around all the groaning masses with monstrous hangovers filling up their beakers with more cheap booze. Mr Fed is telling everybody the party’s still in full swing and to get up for one last dance.
He points at the party-poopers who are saying that the party is over and the house needs tidying and tells the other revellers not to listen to them. “Just one last dance” Mr Fed pleads.
And to your amazement, the partygoers aren’t doing the sensible thing; instead they are getting drunk again and dusting themselves off to take that last dance. It seems inconceivable that seemingly rational people can act in such an irrational way, just like it is seemingly inconceivable that a nation in bankruptcy would crush each other to get their hands on some more Chinese made tat. The only excuse is the booze, or in the real world, cheap credit.
Simply put, the western world has been on a debt binge for the past 30 years, and the damage to the economy and savings is devastating. But the world has been conned into one last dance before Mr and Mrs Reality pay a visit. The consequences when they get here will be quick and severe.
The question is, who do you want to be at the party? The drunken fool conned into one last dance. You could hang around and try and repair the house yourself, but the damage is so severe it will take more than one person, and why should you cover the costs for other peoples continued misdeeds?
The best, and most rational course of action? Walk away. Leave the suicide shoppers to take their sad last dance. Find your coat and leave.
How can you do this in the real world? Opt out of the central banking system and far away from Mr Fed. Buy gold, buy bullion, buy sovereigns, buy whatever you can that is real and save your money. Because when you watch the madness of crowds ‘suiciding’ their own livelyhoods it can only end one way. The world will need sober people with savings to help bulldoze that party house and consign it to history for a long, long time.
Tom Paterson
Chief Economist
Editorial view: Tom tells me that the mainstream view of economics in the UK is so deeply flawed that “they’ve become so irrelevant”. I look forward to more of his pieces. With bailouts being rejected in Ireland and students on the march rejecting austerity, I’m glad the leaders like Tom are emerging. We need an alternative view to the flawed mainstream economic policies that have got the world into the mess it finds itself in. We needs more Toms and fast!
Tom is the Chief Economist at Gold Made Simple, one of the world’s leading gold bullion ownership and trading services. Tom previously worked as a Broker on a Futures and Options desk at a main brokerage in Canary Wharf and was responsible for the production of “The Economissed” , a research paper tracking Macro themes and trade ideas. Tom is a keen student of the Austrian School of Economics – or as he refers to it ‘real’ economics – and feels very passionate about the lessons that can be gained by all that understand its guiding principals.