Long on the U.S. Consumer --Mark’s Market Commentary

Capitalstool.com ^ | 8/20/02 | Mark

[razorback-bert]

Here's the Prudent Bear Market Summary by Rob Peebles

Northern Trust’s insightful and understandable economist Paul Kasriel recently noted that the consumer spending spree during the bubble years was no mirage. In fact, consumer spending as a percentage of disposable personal income broke out of a 35-year range around 1995. Household net worth as a percent of disposable personal income did the same. More amazing, Kasriel notes that in the Postwar period, household net worth never declined year-end over year-end until 2000. It declined again last year, and Kasriel thinks it will come in lower still at year-end 2002. It’s hard to believe that consumption will be vigorous in such an environment.
 
The problem with shrinking net worth is that debt loads don’t shrink along with them. In a recent interview, elliottwave.com’s Bob Prechter summed upon the debt situation thusly:  ”During that third wave, from 1942 to 1966, consumer debt was only 64% of annual disposable personal income on average. At the end of the fifth wave in the year 2000, it was 97%, and as you point out, right now, it’s over 100%. So debt is greater than annual disposable income. We had total credit market debt at 150% of GDP back in the third wave. It’s 300% today.”
 
Debt is a drag.

[RightWhale]

“All over the world, money is flowing into safe assets”

For some affluent families, this is college funds.

[Wyatt's Torch]

Dukie - increases in the monetary supply are not, in and of themselves, necessarily inflationary. Inflation/Deflation are monetary phenomenons that relate to the demand for money. When demand for money grows and it is not supplied (via the money supply), money becomes more valuable and is not spent but conserved. When too few dollars are chasing too many goods, you have deflation. the exact opposite is true for inflation. In this case, is M3 and MZM are increasing but not enough to meet the increased demand, you have deflation. That is what we have been seeing for the last 5 years.

[Wyatt's Torch]

The problem with shrinking net worth is that debt loads don’t shrink along with them.

This is the essence of the horrors of deflation. As more current assets are devalued (result of deflation) to the new, lowered dollar value, the long-term debt is still at the old, pre-deflation dollar levels. More valuable dollars paying off less valuable denominated debt. This is the fear in the real-estate market as this is the only asset left that hasn't devalued due to it's extremely long contract lengths.

[LS]

I can't give you a source right now, but these numbers are nowhere close to what I have seen. Basically, consumer debt to household equity was slightly higher in the 1990s than the 1980s. SLIGHTLY. You can jimmy the figures however you want to arrive at the ABSURD "300%" stat, but you know that simply defies reality. Americans do not owe THREE TIMES what they own.

This MIGHT mean 300% debt to INCOME (and I think that is high). But what has happened in the last 30 years is that "forced" savings of all sorts, along with government subsidized home ownership, has soared. Think about company pension plans, social security, health insurance (which is a form of income): Like it or not, all of these are "assets," along with life insurance, the home, and outside-the-company savings. As I say, the 300% number is nowhere close---not in the same UNIVERSE---as the numbers other economists have come up with.

[Dukie]

Hi W.T.

I understand your point, that while the monetary aggregates have been growing, the preference for holding the dollars - or investing them real estate for example - rather than spending them has resulted in the flat to declining trend in consumer prices. See the following from Stepher Roach at Morgan Stanley & his concern about outright deflation.

http://www.morganstanley.com/GEFdata/digests/20020815-thu.html#anchor0

But what about the virtual ocean of dollars held by Europe, Japan, China, etc. and the claims they eventually represent against the US economy as a catalyst for consumer price inflation ?

[LS]

Look, no matter WHO "HOLDS" the dollars, they are "inflationary" if PRINTED. Either in the form of investment interest or in the form of money being used for purchases, no money is "inactive". So either we have inflation or we don't---you can't point to "pools" of money held by others as if it is a big poker chit waiting to be played. It's a flawed assumption.