The Lack Of Consumer Spending Is The Problem, Right?

Everyone knows that what is causing the recession is the “gap” in consumer spending, Right? That is the explanation according to Keynesian economics and that’s what we have been told. So after spending trillions of dollars trying to fill the consumer spending “gap” and creating $15 trillion in debt; we have been told (Paul Krugman, et.al.) that we just didn’t spend enough.

Great, so we are now about to spend some more on: 1, a new “jobs” bill that will do nothing but add to the debt and accomplish nothing long-term and 2, a new Quantitative Easing Program ( QE3 or money printing) to help the banks and hurt savers.

Printing money does levitate the market, especially when the new printed money goes to banks who can then invest it in the capital markets and in higher paying foreign investments. BUT, consumer spending is not our problem. Here are some numbers from the Bureau of Labor Statistics (dollars in trillions) that prove the point.

Year....................2006 2007 2008 2009 2010
Government
Expenditures...........$4.14 $4.43 $4.73 $4.99 $5.26

Personal
Consumption............$9.52 $10.00 $9.74 $10.34 $10.45

Private Fixed
Investment
(Business
Spending)..............$2.26 $2.26 $2.12 $1.70 $1.72

This is telling us that the real problem is Business Investment. It is down by $539 billion or 23% from the peak in 2007; and running at about 76% of the 2006 level.

Isn’t this the real question: Why are businesses unwilling to invest and grow? Or is all the investment overseas where the business climate is more favorable?

Get Ready for the Election Season and the End of QE2

Most economists believe that no serious disruption to the economy (or markets) will occur when the Federal Reserve ends QE2 (the printing of $600 billion) in June. They also believe the economy is on a sustainable growth path (but below trend growth levels) and that the economy will continue to improve over time.

Sure, there are some who think the government needs to print even more money to encourage employment growth and wage increases (besides, debt is not a problem and interest rates are low.) And there are a few who think the Fed should raise interest rates now to deter inflation and reduce taxes to incentivize employment (besides, spending is not the problem; debt and low interest rates are the problem.)

Since this view (borrow and spend) is what got us into this problem and is currenty keeping the economy levitated; it does not make sense that the government can simply stop increasing the money supply and we all go merrily on our way or we would have stopped printing money long ago.

Unless savings increase enough to fill the gap left by the Fed (unlikely), GDP will decline (maybe after some lag time) and politicians will panic (elections are coming! elections are coming!) We will be subjected to a news cycle of endless attack speeches, ads, vetoes, etc. about the debt ceiling, budgets, etc. Not exactly tranquility.

Also, with GDP declining, banks will be less inclined to lend (so neither savings or loans will make up for reduced government spending.)

Now, add in a slower-volume summer market and you have the ingredients for a very volatile market full of surprises (and counter surprises.) One must be nimble short-term. Longer-term, any time there is a dip in GDP or a stock market dip, I believe the government will do the only thing it knows how to do, borrow and spend.

What's Next For The Market?

Technically, the market is at an inflection point. According to the Dow Theorists, if the Dow breaks 11,823.7 if would signal a correction and even put the market into another bear market. While technical analysis can be correct sometimes, it can also be incorrect sometimes. If it always worked, you could buy the right algorithm, kick back and relax. But, on the other hand, many traders follow the Dow Theory and that alone could move the market for a while.

We do know that the markets are levitated due to government spending and require additional government spending to keep going. So far, talking about cutting government spending is just talk; nothing significant has actually happened. I suspect cuts, if any, will be minor (less than the $1.5 trillion needed to get us a balanced budget.) Therefore, for the moment, I assume overspending and quantitative easing will continue, maybe for years.

also, Fed Chairman Bernanke has the stock market targeted as one of him main objectives. He wants the market to go higher so “animal spirits or greed” will kick in and take over so “real” consumer spending can take place. Therefore, If the market should sell off to 10,000 +/- (about a 15% drop), I think the government will intervene with both stimulus and more quantitative easing (printing money.) After all, it’s only 19 months to the next election…and voter pain will not be tolerated.

Chairman Bernanke Effectively Downgrades the Economy

Media coverage of the Federal Open Market Committee (FOMC) meeting on Wednesday basically stated that little had changed from the April 28th meeting: interest rates remain at basically zero percent and will remain so for some time, the economy was in recovery, etc. However, there were some serious changes made to Mr. Bernanke’s statement that implied things were deteriorating rather getting better.

Most media coverage focused on what did not change in Bernanke’s statement: they left rates at zero, for an extended period, subdued inflation trends and expectations, continued low rate of plant utilization, unemployment continues to be a concern, etc.

But, here are some significant changes in attitude and content that, I think, effectively downgrades the growth rate for the U.S. economy. For example:

1.Attitude. Less talk about short-term tightening and the timing and plans to do so,

2.Economy. In the previous statement (April), Bernanke stated, “Economic activity has continued to strengthen.” In this June statement, he stated, “The economy continues to recover.” (this is far different from continues to strengthen and I think a downgrade on growth rates)

3.Employment. In April, “Labor markets beginning to improve.” In June, “Jobs are being created, gradually.” (Again, I think a less robust outlook.)

4.Financial System. In April, “Financial market conditions remain supportive of economic growth.” In June, “Financial conditions have become less supportive of economic growth...”

5.Housing. In April, “Housing starts have edged up but remain at d depressed level.” In June, he left out “have edged up” and simply said, “: Housing remains at a depressed level.”

I think this is significant because Bernanke and the Federal Reserve Bank have been trying, very hard, to present the economy as beginning to improve. After all, as good Keynesians, they have already spent a ton of our money and they need those “animal spirits” (I guess that means our greed) to make the handoff from government spending to private spending (or their theory doesn’t work.) Is this a signal that we will get even more government spending?