Tag Archives: Consumption

The Global Power Shift Isn’t West to East–It’s Not That Simple, by Charles Hugh Smith

The power shift is going to be from those who borrow or beg to those who produce. From Charles Hugh Smith at oftwominds.com:

The mercantilist dependence on exports for growth, a winner for the past 70 years, has reached diminishing returns. Rather than be a source of growth, it’s a source of stagnation.

Conventional wisdom holds that geopolitical power is inevitably shifting from West to East. It isn’t quite this simple. The real shift is occurring between three sources of power that are not so neatly geographic:

1. The commodity exporters

2. The mercantilist exporters of products

3. The consumer-importing nations

Gordon Long and I tease apart the many dynamics in this complex power shift in Tectonic Shift of Mercantilism Revalued (42 min). There are three starting points: neocolonialism, mercantilism and importer by choice.

In classic colonialism, the colonial power expropriated commodities by force. The invaders took control of commodity-producing nations via military force and then oversaw the extraction of low-cost raw materials to provide the home markets with cheap materials to feed the colonial power’s valued-added manufacturing. The manufactured goods were then sold in the captured markets of the colonial states.

In what I call the Neocolonial Model, the control mechanism isn’t military force, it’s financialization and globalization. The Neocolonial Power extends cheap credit to the commodity exporting nation, and the state and its citizens gorge on this heretofore unavailable banquet of debt. Soon the state and its enterprises are creaking under unsustainable debt loads, and the Neocolonial Power swaps assets for debt, buying up the most valuable resources on the cheap or extracting the wealth via interest payments and refinancing.

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The Debtor’s Prism, by Lance Roberts

You can get so used to debt and opiates that you can fool yourself into thinking the highs they produce are normal. From Lance Roberts at realinvestmentadvice.com:

As noted by Robert Schroeder:

“Last week, the debt hit $21 trillion for the first time, rising from the $20 trillion mark it notched on Sept. 8. The debt is guaranteed to go higher, with President Donald Trump having signed a debt-limit suspension in February, allowing unlimited borrowing through March 1, 2019. Economists expect wider deficits to result from the tax cut Trump signed in December.

While a trillion-dollar increase over roughly six months isn’t unprecedented — there was one in 2009, during the Great Recession, and another in 2010 — it’s certainly fast.”

Excessive borrowing by companies, households or governments lies at the root of almost every economic crisis of the past four decades, from Mexico to Japan, and from East Asia to Russia, Venezuela, and Argentina. But it’s not just countries, but companies as well. You don’t have to look too far back to see companies like Enron, GM, Bear Stearns, Lehman and a litany of others brought down by surging debt levels and simple “greed.” Households too have seen their fair share of debt burden related disaster from mortgages to credit cards to massive losses of personal wealth.

It would seem that after nearly 40-years, some lessons would have been learned.

Apparently not, as Congressional lawmakers once again are squabbling on not how to “save money” and “reduce the federal debt,” but rather “damn the debt, full speed ahead with spending.”

Such reckless abandon by politicians is simply due to a lack of “experience” with the consequences of debt.

To continue reading: The Debtor’s Prism

BlackRock CEO Fink: Negative & Low Interest Rates Eat into Consumer Spending at Worst Possible Time, by Wolf Richter

The flip side of those low, low borrowing rates is no, no income from bonds and other savings vehicles. From Wolf Richter at wolfstreet.com:

“A hostile landscape” – that’s what BlackRock CEO Larry Fink called the global investment, economic, and political environment in his gloomy annual letter to his shareholders. It starts out propitiously:

Investors today are facing tremendous uncertainty fueled by slowing economic growth, technological disruption, and social and geopolitical instability.

More specifically:

In China, growth is slowing with global effects.

In the U.S., the quality of corporate earnings is deteriorating, with record share repurchases in 2015 driving valuations – an indication of companies succumbing to the pressures of short-termism in place of constructive, long-term strategies.

And electoral politics muck up the global landscape further:

Polarizing elections in the US and Germany; government transitions in Spain, Taiwan and Canada; allegations of scandal in Brazil, and the UK vote in June on whether to leave the European Union will all continue to drive volatility.

But the impact of low and negative interest rates central banks have imposed on economies around the world is “particularly worrying,” he said. And yet, it’s swept under the rug.

There has been “plenty of discussion” on how low interest rates help trigger asset price inflation, as investors chase yield by loading up on riskier and less liquid asset classes – “with potentially dangerous financial and economic consequences.” But…

Not nearly enough attention has been paid to the toll these low rates – and now negative rates – are taking on the ability of investors to save and plan for the future. People need to invest more today to achieve their desired annual retirement income in the future.

For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.

This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals; and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.

Is this why BlackRock is pulling its money out of Japan, where consumer spending, after two decades of ultra-low interest rates, and now negative interest rates, has been weak for just as long – and getting weaker?

To continue reading: BlackRock CEO Fink: Negative & Low Interest Rates Eat into Consumer Spending at Worst Possible Time

He Said That? 10/20/15

Consumption, in the long run in which we are all dead, ultimately cannot be greater than production. Who knew? From David Stockman:

In short, the affliction of Keynesian economics brought many ills to the modern world, but repeal of Say’s Law was not among them. You can have a one-time credit party, but when it inevitably ends, consumption spending defaults to that which can be financed from current incomes. Consumption is the consequence of production and income, not its cause.

Red Swan Descending

The American Consumer Will Never Be Back, by Raúl Ilargi Meijer

Repaying debt is not “saving,” and you cannot spend what you don’t have. Two things most of us know but which don’t make it into a lot of economics textbooks. A lot of what makes it into the textbooks, and into MSM commentary on economics, is pure gobbledygook, which Raúl Ilargi Meijer skewers at automaticearth.com:

That title may be a bit much, granted, because never is a very long time. I might instead have said “The American Consumer Won’t Be Back For A Very Long Time”. Still, I simply don’t see any time in the future that would see Americans start spending again at a rate anywhere near what would be required for an economic recovery. Looks pretty infinity and beyond to me.

However, that is by no means a generally accepted point of view in the financial press. There’s reality, and then there’s whatever it is they’re smoking, and never the twain shall meet. Admittedly, my title may be a bit provocative, but in my view not nearly as provocative, if not offensive, as Peter Coy’s at Bloomberg, who named his latest effort “US Consumers Will Open Their Wallets Soon Enough”.

I know, sometimes they make it just too easy to whackamole ‘em down and into the ground. But even then, these issues must be addressed time and again until people begin to understand, and quit making the wrong decisions for the wrong reasons. People have a right to know what’s truly happening to their lives, and their societies. And they’re not nearly getting enough of it through the ‘official’ press. So here goes nothing:

US Consumers Will Open Their Wallets Soon Enough

People are constantly exhorted to save, but as soon as they do, economists pop up to complain they aren’t spending enough to keep the economy growing. A new blogger named Ben Bernanke wrote on April 1 that there’s still a “global savings glut.” Two days later the Bureau of Labor Statistics announced the weakest job growth since 2013, which economists quickly attributed to soft consumer spending.

The first problem with Coy’s thesis is that even if people open their wallets, far too many of them will find there’s nothing there. And Bernanke simply doesn’t understand what savings are. His ideas through the past decade+ about a Chinese savings glut were always way off the mark, and his global – or American – savings glut theory is, if possible, even more wrong. In the minds of the world’s Bernankes, there’s no such thing as people opening their wallets to find them empty. If they don’t spend, they must be saving. That there’s a third option, that of not having any dollars to spend, is for all intents and purposes ignored.

http://www.theautomaticearth.com/2015/04/the-american-consumer-will-never-be-back/

To continue reading: The American Consumer Will Never Be Back