Double Whammy Economics, by MN Gordon

The US consumer is pulling in his or her belt and not spending as much, but don’t worry, that always happens just before riproaring econonomic expansions, like the kind we’ve been promised for the last six years. Be patient, it’s just around the corner. From MN Gordon at

What’s up with the U.S. consumer? They seem to have come to their senses at the worst possible time. They can no longer be counted on to push economic growth up and to the right. Specifically, they’re not spending money on stuff.

According to Wednesday’s Commerce Department report, U.S. retail and food services sales for March declined 0.3 percent from February. Apparently, U.S. consumers are tapering back on auto purchases and spending at restaurants, bars, and clothing and department stores. What’s more, sales have fallen or been flat for each of the first three months of the year.

“We are seeing much less impulse buying and hearing more ‘I need to go home and think about it,’” said Randal Weeks, owner of Gray Living, a home décor store in McKinney Texas. Similar anecdotes are being reported by retailers across the country. What in the world is prompting this consumer ambivalence?

“Shoppers feel uncertain because of a stock market that fell more than 10 percent in six weeks and the recent terror attacks in Europe, said Bob Phibbs, CEO of The Retail Doctor, a consulting company based in Coxsackie, New York. And Gray Living’s Weeks said a few of his customers have said they are uneasy because of the presidential election; they don’t have a sense of how it will turn out.”

Perhaps these explanations have something to do with the consumer’s sudden resistance to spending. Still, such instances haven’t held consumers back in the past. There must be something much, much more demanding at work.

Doing the Opposite

If you recall, way back in 2000, when the economy was crumbling from the tech bubble implosion, Dallas Fed President Robert McTeer told everyone that “everything would be OK if we’d all just hold hands and buy SUVs.” The Fed then proceeded to provide gobs of easy credit. And, for many years, the consumer did their part to borrow and spend it. Moreover, after 9/11, consumption became patriotic.

By artificially holding down government bond yields, central bankers believed the big banks would increase lending and create consumer demand. The increased consumption, said their theory, would stimulate the economy and push inflation up to the Fed’s 2-percent target. In practice, this hasn’t happened.

In fact, as interest rates have fallen economic growth has stagnated. Presently, Swiss and Japanese 10-year government bonds are yielding negative returns. Investors are, in effect, paying these governments for the privilege of loaning them money. Nonetheless, they are not borrowing and spending…they are hoarding cash.

Similarly, Fed policies have continued to focus on stimulating growth with issuances of cheap credit. By comparison, the U.S. 10-Year Treasury note’s yielding about 1.7 percent. Yet even this paltry rate is having the opposite effect of what the Fed intended.

Somehow all the smart and clever government economists miscalculated what it is, exactly, their policies would be doing. Specifically, ultra-low or negative rates are not encouraging consumers to borrow and spend money. To the contrary, they’re encouraging increases in savings.

To continue reading: Double Whammy Economics

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