The Fallacy Of A Consumer-Led Recession And The Converse Fallacy Of A Consumer-Led Recovery. Seemingly, The Entire World Is Wrong.
This is the holiday present I promised. This post is somewhat of a puzzle as are many of my other posts. I don't always share specifics about my models or everything I am thinking. I am here to encourage free thought and people thinking for themselves. Therefore, I'm not going to throw all of the marbles on the table here as it pertains to sharing specific data behind this post but I'll share enough to expose the fallacies surrounding one of the greatest dupes in modern times - consumer-led recessions and recoveries. And to give people enough to either do their own research or draw some of their own preliminary conclusions. When you are finished reading this, hopefully you will gain a new appreciation for how substantial the scope of this crisis is.
We have written countless times over the last five years that there is no such thing as a consumer-led recession. Yet I really haven't provided an indepth explanation beyond some of my early remarks early in the life of the blog. I really had no intention of ever putting up this post but with the entire world completely duped by faulty analysis of this crisis, as a contrarian I can't resist. Every financial blogger, all of the financial media, seemingly all economists, all of Wall Street and all politicians around the world are focused on the mythological consumer-led recession. Bulls eagerly await consumer data to find nuggets to validate a recovery. Bears point to consumer debt loads as validation of a tapped out consumer. Basically, everything that has been supposed over the last four or five years by both bulls and bears is either completely wrong or at best, very incomplete.
Many in the blogosphere have done a great service by writing about issues with housing, commercial real estate, derivatives, debt, etc., Financial bloggers have almost completely replaced the financial press as the source of truth. Be that editorializing or the creation of original content and even investigative journalism. Not really a surprise. But they have miss the forest through the trees. These are symptoms of the underlying economic root causes of this crisis not the crisis itself. Something we have written of ad nauseam on here. If one truly understands economics and can connect the dots of what we see before us, one easily understands my remarks. Why is this so important? Well, three main reasons. The main reason is if we are going to find solutions to this crisis, we must first identify its causes. Secondly, so that we don't make the same mistakes in the future. Thirdly, if one understands the economic drivers of this crisis then one can more accurately anticipate its outcome and accordingly protect ones self more effectively. I am talking about economic root causes. Not causes of profligate politicians being the source of this crisis. Yes indeed they are. But trying to fix many of the issues cited above is having little effect because the doctors are treating the patient's symptoms rather than the ailment. Keynesians have been almost completely wrong in their interpretation of his views on this type of crises, Monetarists are going to be completely debunked as we have written quite often and Austrians have been right about credit but they still don't understand the underlying cause of the crisis. And, in fact, I really haven't seen very many who actually understand economics beyond credit. Therefore their views on solving it are typically very inaccurate. In fact, most argue for this mathematically-challenged notion that you let a complex system fail and somehow the world will pick up the pieces and we'll all live happily every after - an ungodly anti-scientific answer that will almost certainly result in a total bust. I would call this the religious doctrine of economics - one that eschews all science in favor of ideology. Ideology never proven but read in a book somewhere.
Everywhere I turn I read the consumer this, the consumer that, the consumer-driven Anglo-Saxon culture. The economy won't recover while the consumer is paying down debt. The economy will muddle through until the consumer reduces their debt level. Bulls and bears alike participate in this babble. The politicians and economists in the last and current White House economic teams are equally guilty. First Bush's stimulus package encouraging the consumer to spend then Obama's team follows up with the same psycho babble. When Christina Romer, White House economic misinformation officer, remarked on a Sunday political show six months ago that it was a good time to buy a car, I knew any hope of a new administration effectively dealing with this crisis was completely dashed. Dashed by the reality of President Obama surrounding himself with advisors embracing the same lack of sound economic training that has gotten us into this mess. Because of that fact, the world is missing the scale and scope of this crisis, they are mistakenly calling an end to this crisis and they are formulating incorrect policy for a recovery. The crisis instead is worsening not only for the messes created to date but because of economic ideology and associated policy decisions that continue around the world. Especially foolish are the policies of the two gorillas dancing the waltz - China and the United States. No surprise since both countries are run by fascists. China by the communist party. The United States by fascist bankers paying off our leaders which leads to a continuation of failed ideology. And, in fact Wall Street's involvement in our government is indeed fascist. Read a book if you question my use of the term.
It matters not if you are a Nobel Prize winning economist (and there are many who believe), if you believe we are witnessing a consumer-led recession, you really don't understand economics. I don't know why we have economists so utterly unfamiliar with economics. Maybe they don't teach this fact in modern economics curriculum or maybe most economists simply didn't pay attention to their professors or maybe the distribution of economists is defined by Pareto's Principal (in other words most are incompetent) or maybe it is because most people commenting on the economy don't really understand economics, but it is scientifically impossible to have a consumer-led recession. Great minds in economics have known this fact for hundreds of years. To deny this is to question if the sky is blue. And if someone can't explain why it is a fact, then they fall victim to the foolish notions advocated by nearly every media outlet, economist, politician, bankster and most financial bloggers. And that is exactly what has happened. It is like a chain letter. One person starts the consumer-led recession myth and every single source of information piles on without clearly understanding what they are talking about. In other words:
It matters not if you are a Nobel Prize winning economist (and there are many who believe), if you believe we are witnessing a consumer-led recession, you really don't understand economics. I don't know why we have economists so utterly unfamiliar with economics. Maybe they don't teach this fact in modern economics curriculum or maybe most economists simply didn't pay attention to their professors or maybe the distribution of economists is defined by Pareto's Principal (in other words most are incompetent) or maybe it is because most people commenting on the economy don't really understand economics, but it is scientifically impossible to have a consumer-led recession. Great minds in economics have known this fact for hundreds of years. To deny this is to question if the sky is blue. And if someone can't explain why it is a fact, then they fall victim to the foolish notions advocated by nearly every media outlet, economist, politician, bankster and most financial bloggers. And that is exactly what has happened. It is like a chain letter. One person starts the consumer-led recession myth and every single source of information piles on without clearly understanding what they are talking about. In other words:
"An error does not become truth by error of multiplied propagation, nor does truth become error because nobody will see it" -- Mahatma Ghandi
On that note, this argument that we cannot continue with 60% to 70% of GDP as consumer demand is another related myth. There is absolutely no truth to it. The U.S. consumer has been approximately 60-70% of GDP since statistics have been collected. When the U.S economy was the envy of the world, it was 60-70% of GDP. And when it collapsed, it was 60-70% of GDP. At volatile extremes, it has been even higher. The data goes back one hundred years and has never wavered. I know because I have the data. Now we may see consumption drop to 64% or 65% from 69% or some other marginally insignificant change in data but those pointing to overconsumption as a cause of this crisis, and there are many, are ideologically driven. Because of that, they don't understand the macro factors driving this environment, the major and permanent changes that are taking place in the underlying global economy or how to get out of this mess. Frankly, if everyone understood the historical context of consumption data they wouldn't be pointing to these statistics as an unsustainable dynamic or concern. This misinformation sucks in both bulls and bears and, in fact, has been a primary argument for the majority of bears. This is loosely tied to these remarks now building that the U.S. is becoming a nation of savers. Another myth. Our savings aren't increasing for the vast majority of people. The reality is our consumption is dropping because we are insolvent as a society. And because remaining income is now being allocated to paying down debt. Those who survive this crisis might have a higher savings rate but that won't be because we have an unsustainable amount of GDP based in consumption. It is because of other dynamics that will develop. That goes well beyond a behavioral change driven by fear of reliving this environment.
One might also consider the reason we have such a high consumption rate is a basic tenet of why the Revolutionary War was fought. The very reason why America became the greatest nation ever to grace this earth. And why immigrants have poured into our nation by the tens of millions from every country on earth for hundreds of years. These basic human rights surrounding consumption are part of our Constitution. It's called self-determination and the rights of individuals to own their own means of consumption or more commonly called property rights - a substantial theme of our Constitution and Declaration of Independence. I mean that on a much higher level than a wage to buy a television set. I mean in the spirit of inalienable human rights of self-determination. That my body and my mind are my property as was meant by our founding fathers.
People that are now coming out and stating that we consume too much are making dubious moral judgements founded in their personal beliefs of what is acceptable human behavior. Or based on a faulty analysis of this crisis. These are nothing more than opinions. Lies of the mind. Some of these might be appealing given our current consumption model leads to polluting the planet and destroying the environment (because we don't factor in costs including end of life management, packaging waste, etc into the product lifecycle equation - a major contributor to the poisoning of our planet and ultimately to humanity.) but we would be hard-pressed to find a morality-based consensus on consumption. The opinions would be as varied as the hundreds of millions of minds which make up this country because this is not a debate about universal morality. Beyond a basic rule of law, no one person is going to tell another how they should lead their lives in a society of choice. Who is the arbiter of what is acceptable? I'll tell you who the arbiter is. It's you. It's me. It's called personal choice. It's called freedom of mind. The consumer is not what is wrong with the American economy whether one morally agrees with current consumption dynamics is irrelevant. And neither is debt. They are symptoms. Statements that have come across this blog countless times while the world chatters incessantly about relatively meaningless topics. Or topics which would be meaningless were we to be addressing the causes of this crisis.
So, let's look at some further data. That being GDP. GDP is simply one method to measure economic metrics of a particular country's economy. It isn't the Bhagavad Gita or the Qur'an or the Bible. It is simply a measurement. One way I could measure myself is that I have brown eyes and hair. Or that I am wearing blue jeans and a t-shirt. Or that I wear glasses. Or all of the above. Including all of that data would give someone a marginal representation of me. Not a complete representation. GDP is simply one accumulated measurement of the American economy yielding a marginal representation. It isn't the only measurement and it isn't the most representative measurement either. That GDP's content is relatively meaningless but is accepted as the primary economic measurement by economists should tell you something if you are a contrarian. GDP can grow at whatever rate the government creates new debt beyond that of the private sector's growth throughout this crisis. Yet how relevant is that to a functioning economy? It doesn't matter if that spending is on pencils, Ferraris or movie tickets. Yet, none of these increase society's wealth or have any meaningful impact on employment. We have somewhere between one quarter and one third of all people underemployed or unemployed and GDP has not been and is not capturing the underlying dynamics of the economy.
Let's tie this in to another remark we have made on here. And do so by using a different measurement than GDP. Something you won't read anywhere else. And I do mean no where else. Not because it isn't fact but because the entire world is consumed (pun intended) with the wrong analysis of this crisis and a completely faulty understanding of economics. And I do literally mean completely faulty. Business trade in the U.S. economy is about four times the size of consumer spending. That is right. Four times. Business trade in the economy never has been nor could it ever be equaled by consumer demand. Consumer demand is driven by income and it is quite obvious income is a relatively small percentage of overall business trade. Yet we are told the consumer is 65% of the economy. Often by Nobel Prize-winning economists. Wrong! The consumer is 65% of a particular measurement of the economy. That being GDP. They are clearly not the same yet even this remark is used interchangeably.
If someone would take the time to apply common sense to the fact that consumer spending is some percentage of wages and wages are some relatively small percentage of business trade, we would be able to develop a reasoned reality on all of this mythological consumer-led recession and consumer-led recovery banter. Government spending too is a contributor to GDP but in actuality what is government spending? It is simply some apportioned amount of income and corporate profits. As we have highlighted, government spending was on track to account for 44% of GDP this past year. But how does government contribute to overall wealth creation when it is simply taking money from Peter to pay Paul? It doesn't. Yet it is a measurement of GDP. A substantial measurement in today's environment. Maybe a different way to consider government spending as it pertains to the fallacies of this post is to consider why government has needed to run ever-larger deficits for the last thirty years in order to sustain the perception of GDP growth. And what if they hadn't? Might we even possibly conclude that peak economic activity in the most impactful business sectors of the American economy occurred in the late 1970s? And that is why government has had to play a larger and larger role in the economy and run larger and larger deficits? Ridiculous you say? Hahaha.
If you consider the scope of business trade in the American economy, all of a sudden consumer spending pales in comparison to overall economic activity, now doesn't it? It should. And so should all of the incessant babble focused on a consumer recovery. It is not the consumer that drives the economy. If consumer spending would fall by a drastic ten percent, it would still be an almost insignificant dent in comparison to the overall trade in the American economy. In fact, it would be only two percent. We would absorb this behavioral change like an after dinner mint with all other things being equal. Yet the economy hasn't absorbed this drop like an after dinner mint. Therefore, might you conclude all other things are not equal? That the underlying problem is not the consumer?
Just as in 1929, many bears were initially right to be concerned about a growing crisis. Then before the final and most horrific collapse, many of the bears turned bullish and re-entered financial markets in 1930 - comparative to 2009. All because they misunderstood the dynamics driving the crisis. Caught in the economic tsunami they didn't see before them. It was there. It was building. They simply didn't understand it. That same dynamic is at work today as many bears are either publicly remarking the worst of this global crisis has passed or are turning outright bullish. They are doing so because they don't really understand the magnitude of the dynamics driving this crisis. Just like 1929. Back in 2006 when the world was basking in its economic glory and Wall Street was hailed as brilliant savants, we wrote that it wouldn't be surprising to see all global wealth created since 2000 to be destroyed. By the time the world awakens to the horror before it, that dynamic will have already played out on some level. The status quo cannot fix this problem. We need a new economic model as we have so incessantly ranted.
There is no such thing as a consumer-led recession or a consumer-led recovery. There never has been. There never will be. Competent economists know this intrinsically by the very nature of their understanding of how the economy works. What ails the global economy is much more substantial in scope and scale than most anyone is talking about. Well, except for us and a few other voices in the wilderness. We predicted most everything that is happening on a major scale around the world today because of what I would classify as some of the strongest quantitative models in finance. And a deeper qualitative understanding of economics than anyone on Wall Street or in the mainstream media. At least anyone available for public consumption. People should be careful of what they choose to believe based on inaccurate ideology of faulty economists or financial bloggers or the media. There are blind spots in any analysis but there are enormous blind spots in ideology that doesn't understand the complexities of measurable and real economics and not the theory and ideology we hear so often.
Given humanity's natural herding behavior and natural tendency of people to mimic others, is it really that surprising the entire world is focused on the wrong analysis of this crisis? And they have been from the beginning?
On that note, this argument that we cannot continue with 60% to 70% of GDP as consumer demand is another related myth. There is absolutely no truth to it. The U.S. consumer has been approximately 60-70% of GDP since statistics have been collected. When the U.S economy was the envy of the world, it was 60-70% of GDP. And when it collapsed, it was 60-70% of GDP. At volatile extremes, it has been even higher. The data goes back one hundred years and has never wavered. I know because I have the data. Now we may see consumption drop to 64% or 65% from 69% or some other marginally insignificant change in data but those pointing to overconsumption as a cause of this crisis, and there are many, are ideologically driven. Because of that, they don't understand the macro factors driving this environment, the major and permanent changes that are taking place in the underlying global economy or how to get out of this mess. Frankly, if everyone understood the historical context of consumption data they wouldn't be pointing to these statistics as an unsustainable dynamic or concern. This misinformation sucks in both bulls and bears and, in fact, has been a primary argument for the majority of bears. This is loosely tied to these remarks now building that the U.S. is becoming a nation of savers. Another myth. Our savings aren't increasing for the vast majority of people. The reality is our consumption is dropping because we are insolvent as a society. And because remaining income is now being allocated to paying down debt. Those who survive this crisis might have a higher savings rate but that won't be because we have an unsustainable amount of GDP based in consumption. It is because of other dynamics that will develop. That goes well beyond a behavioral change driven by fear of reliving this environment.
One might also consider the reason we have such a high consumption rate is a basic tenet of why the Revolutionary War was fought. The very reason why America became the greatest nation ever to grace this earth. And why immigrants have poured into our nation by the tens of millions from every country on earth for hundreds of years. These basic human rights surrounding consumption are part of our Constitution. It's called self-determination and the rights of individuals to own their own means of consumption or more commonly called property rights - a substantial theme of our Constitution and Declaration of Independence. I mean that on a much higher level than a wage to buy a television set. I mean in the spirit of inalienable human rights of self-determination. That my body and my mind are my property as was meant by our founding fathers.
People that are now coming out and stating that we consume too much are making dubious moral judgements founded in their personal beliefs of what is acceptable human behavior. Or based on a faulty analysis of this crisis. These are nothing more than opinions. Lies of the mind. Some of these might be appealing given our current consumption model leads to polluting the planet and destroying the environment (because we don't factor in costs including end of life management, packaging waste, etc into the product lifecycle equation - a major contributor to the poisoning of our planet and ultimately to humanity.) but we would be hard-pressed to find a morality-based consensus on consumption. The opinions would be as varied as the hundreds of millions of minds which make up this country because this is not a debate about universal morality. Beyond a basic rule of law, no one person is going to tell another how they should lead their lives in a society of choice. Who is the arbiter of what is acceptable? I'll tell you who the arbiter is. It's you. It's me. It's called personal choice. It's called freedom of mind. The consumer is not what is wrong with the American economy whether one morally agrees with current consumption dynamics is irrelevant. And neither is debt. They are symptoms. Statements that have come across this blog countless times while the world chatters incessantly about relatively meaningless topics. Or topics which would be meaningless were we to be addressing the causes of this crisis.
So, let's look at some further data. That being GDP. GDP is simply one method to measure economic metrics of a particular country's economy. It isn't the Bhagavad Gita or the Qur'an or the Bible. It is simply a measurement. One way I could measure myself is that I have brown eyes and hair. Or that I am wearing blue jeans and a t-shirt. Or that I wear glasses. Or all of the above. Including all of that data would give someone a marginal representation of me. Not a complete representation. GDP is simply one accumulated measurement of the American economy yielding a marginal representation. It isn't the only measurement and it isn't the most representative measurement either. That GDP's content is relatively meaningless but is accepted as the primary economic measurement by economists should tell you something if you are a contrarian. GDP can grow at whatever rate the government creates new debt beyond that of the private sector's growth throughout this crisis. Yet how relevant is that to a functioning economy? It doesn't matter if that spending is on pencils, Ferraris or movie tickets. Yet, none of these increase society's wealth or have any meaningful impact on employment. We have somewhere between one quarter and one third of all people underemployed or unemployed and GDP has not been and is not capturing the underlying dynamics of the economy.
Let's tie this in to another remark we have made on here. And do so by using a different measurement than GDP. Something you won't read anywhere else. And I do mean no where else. Not because it isn't fact but because the entire world is consumed (pun intended) with the wrong analysis of this crisis and a completely faulty understanding of economics. And I do literally mean completely faulty. Business trade in the U.S. economy is about four times the size of consumer spending. That is right. Four times. Business trade in the economy never has been nor could it ever be equaled by consumer demand. Consumer demand is driven by income and it is quite obvious income is a relatively small percentage of overall business trade. Yet we are told the consumer is 65% of the economy. Often by Nobel Prize-winning economists. Wrong! The consumer is 65% of a particular measurement of the economy. That being GDP. They are clearly not the same yet even this remark is used interchangeably.
If someone would take the time to apply common sense to the fact that consumer spending is some percentage of wages and wages are some relatively small percentage of business trade, we would be able to develop a reasoned reality on all of this mythological consumer-led recession and consumer-led recovery banter. Government spending too is a contributor to GDP but in actuality what is government spending? It is simply some apportioned amount of income and corporate profits. As we have highlighted, government spending was on track to account for 44% of GDP this past year. But how does government contribute to overall wealth creation when it is simply taking money from Peter to pay Paul? It doesn't. Yet it is a measurement of GDP. A substantial measurement in today's environment. Maybe a different way to consider government spending as it pertains to the fallacies of this post is to consider why government has needed to run ever-larger deficits for the last thirty years in order to sustain the perception of GDP growth. And what if they hadn't? Might we even possibly conclude that peak economic activity in the most impactful business sectors of the American economy occurred in the late 1970s? And that is why government has had to play a larger and larger role in the economy and run larger and larger deficits? Ridiculous you say? Hahaha.
If you consider the scope of business trade in the American economy, all of a sudden consumer spending pales in comparison to overall economic activity, now doesn't it? It should. And so should all of the incessant babble focused on a consumer recovery. It is not the consumer that drives the economy. If consumer spending would fall by a drastic ten percent, it would still be an almost insignificant dent in comparison to the overall trade in the American economy. In fact, it would be only two percent. We would absorb this behavioral change like an after dinner mint with all other things being equal. Yet the economy hasn't absorbed this drop like an after dinner mint. Therefore, might you conclude all other things are not equal? That the underlying problem is not the consumer?
The American consumer is not the cause of this crisis. In fact, the American consumer has nothing to do with the root cause of this crisis. Until this very fact is recognized, we will journey down the path of destruction. And, at this point I frankly don't expect this fact to be recognized until we see a major economic crisis forcing the status quo to re-evaluate the fundamental changes in the global economy that are taking place as I type this. The fact that banksters and their beholden politicians are making decisions about how to fix this economy is almost laughable. They both created it. Because we are listening to a terrible bunch of idiots, we are going to see idiotic policy decisions out of Washington.
There is a tremendous amount of information in this post. Information that an inquisitive mind would easily piece together. Or might eventually come to understand. Or maybe already understands. A major reason why the economy is not coming back and why all of the focus on when consumer spending will pick up again or when will the consumer pay off his or her debts is anecdotally interesting but as it pertains to what matters in this crisis or the future of the global economy, it's pretty much irrelevant.
There is a tremendous amount of information in this post. Information that an inquisitive mind would easily piece together. Or might eventually come to understand. Or maybe already understands. A major reason why the economy is not coming back and why all of the focus on when consumer spending will pick up again or when will the consumer pay off his or her debts is anecdotally interesting but as it pertains to what matters in this crisis or the future of the global economy, it's pretty much irrelevant.
Just as in 1929, many bears were initially right to be concerned about a growing crisis. Then before the final and most horrific collapse, many of the bears turned bullish and re-entered financial markets in 1930 - comparative to 2009. All because they misunderstood the dynamics driving the crisis. Caught in the economic tsunami they didn't see before them. It was there. It was building. They simply didn't understand it. That same dynamic is at work today as many bears are either publicly remarking the worst of this global crisis has passed or are turning outright bullish. They are doing so because they don't really understand the magnitude of the dynamics driving this crisis. Just like 1929. Back in 2006 when the world was basking in its economic glory and Wall Street was hailed as brilliant savants, we wrote that it wouldn't be surprising to see all global wealth created since 2000 to be destroyed. By the time the world awakens to the horror before it, that dynamic will have already played out on some level. The status quo cannot fix this problem. We need a new economic model as we have so incessantly ranted.
There is no such thing as a consumer-led recession or a consumer-led recovery. There never has been. There never will be. Competent economists know this intrinsically by the very nature of their understanding of how the economy works. What ails the global economy is much more substantial in scope and scale than most anyone is talking about. Well, except for us and a few other voices in the wilderness. We predicted most everything that is happening on a major scale around the world today because of what I would classify as some of the strongest quantitative models in finance. And a deeper qualitative understanding of economics than anyone on Wall Street or in the mainstream media. At least anyone available for public consumption. People should be careful of what they choose to believe based on inaccurate ideology of faulty economists or financial bloggers or the media. There are blind spots in any analysis but there are enormous blind spots in ideology that doesn't understand the complexities of measurable and real economics and not the theory and ideology we hear so often.
Given humanity's natural herding behavior and natural tendency of people to mimic others, is it really that surprising the entire world is focused on the wrong analysis of this crisis? And they have been from the beginning?
To the contrary, as a contrarian I would ask how it could really be any other way.
The point I want to leave you with is that everyone should be more inclined to think for themselves or at least to always question authority with every decision that impacts your life. In the end the vast majority of expertise is anything but. No one is an expert in your life more than you. And indeed, if self-determination played a greater role in our society, ie questioning authority, we would never have allowed this environment to come to pass. An environment created by elitist neoliberal idiots - people who don't believe in democracy but instead in telling other people how the world should be. And how you should fit into it.
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