Pity the US consumer?

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I like this cartoon (h/t Kedrosky) for perspective on the past year, though I would perhaps swap a few of the roles around. To me, it’s the regulators that lacked the courage to prick this bubble, and the investors that lacked a brain. I never expected the lenders to have a heart.


The Wizard of Oz was originally written around the turn of the century (last one) as a populist allegory railing against the banks and railroads and Yip Harburg, the lyricist for the 1939 movie, specifically stuck to that intention. I believe the tin man was the factory worker, the straw man the farmer, the cowardly lion was William Jennings Bryan, the fake wizard was Wall Street (as today) and the witches the monopoly trusts. The munchkins were the “little people”. Dorothy was you and me.

Plus ca change…

GDP for Q407 was revised to a negative 0.25%, Q108 to 0.9%, but Q208 was reported at 1.9%. The big story in the data was net exports. Dean Baker (via DeLong):

Exports grew at a 9.2 percent annual rate. More importantly, imports fell at a 6.6 percent annual rate. Together, the change in net exports added 2.42 percentage points to GDP growth for the quarter…

Jobs are weak.

Nonfarm payrolls fell for the seventh straight month in July, while the nation’s unemployment jumped to 5.7%, a four-year high, according to the Labor Department. Underemployment, a more comprehensive measure of the extent of labor market weakness, rose to 10.3%, its highest level since 2003 and two points above its July 2007 level. Since December, 463,000 jobs have been lost, the strongest signal yet that the economy is in a recession.

Tourism is not responding as strongly as one would hope to the weak dollar.

The world’s long-haul international travelers have jumped by 35 million since 2000, yet America has been largely overlooked by those new travelers, despite favorable exchange rates resulting from a weak dollar and attractions like Disney World and the Grand Canyon. In fact, the annual number of foreign visitors to the US is about 2 million lower than in 2000, leading travel-industry experts to figure that from 2000 to 2007, the US economy took a hit of about $150 billion… Foreign visitors to Orlando, Fla., dropped by one-third from 2000 to 2006; by nearly 40 percent over the same period to Anaheim, Calif. (read Disneyland); and by 22 percent to Las Vegas, a frequent entry point for foreigners to the Southwest… in all 50 states, travel and tourism figure somewhere among the top four industries by economic impact.

New York may go broke (again).

Costs are rising and revenues are falling fast. In June 2007 the 16 banks that pay the most taxes on their profits remitted $173m to the state treasury. Last month this dropped to $5m, a 97% decrease. This is a frightening fall given how much the state’s coffers rely on Wall Street taxes: 20% of all state revenues come from financial companies… Wall Street lost 4,300 jobs during the month of June alone… In less than 90 days, the projected deficit over the next three years has jumped 22% to $26.2 billion.

Peter Bernstein has added his voice to the chorus, waxing apocalyptic.

In 2007, as if some kind of secret signal went out among them, housing prices accelerated their decline while the prices of oil and food rocketed higher… the most unusual feature of our current problems: the primary impact of all of them has been on consumers, not on businesses… Today, a halt in the decline of home prices seems the necessary condition to transform the system from despair to hope and to turn the financial sector, now embattled and disorganized, back into the functioning organism the economy needs so badly… To sit back and let nature take its course is to risk the end of a civil society.

Too many developed economies got addicted to asset inflation – the increasing valuations were the only source of yield to service the debt incurred in their purchase – a Ponzi scheme in the Minsky sense. Now that bubble has burst. Houses are a non-productive asset, a consumption good. Values have to fall to where they can be serviced from current incomes – whether via a mortgage payment or rent – or incomes have got to rise via wage inflation. I still don’t see any other way out. The first decimates (many) banks, the second decimates the dollar.

(Paul Davis at Technology Investment Dot Info.

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  1. Anonymous

    Don’t expect tourism to pick up as long as people are harassed by airport security over such nefarious devices as bottles of water — or as long as the administration keeps showing its respect for foreigners in holiday camps in Cuba.

  2. wintermute

    We used to fly through (and stay in) Los Angeles often, up to 2003, on trips from London to Auckland, NZ. But no more. The treatment of international passengers at LAX is dire. People have to stand in hallways for an hour or more, being sniffed by dogs, with no facilities. LAX was friendly 10 years ago – now it is like a military camp. We fly though Hong Kong instead. No trouble there.
    I just can’t help feeling that terrorists have succeeded to a level far beyond the reach of their bombs. They have changed the attitudes of millions of people for the worse.. everyone is assumed to be a trouble-maker until proven innoncent – rather than the other way round.

  3. a skinny brown one

    “To sit back and let nature take its course is to risk the end of a civil society.”

    duh? that’s what Asians said in 1997 when we tried to salvage out countries but what did Washington and the rest of the clowns at the IMF and World Bank say? “well, you put yourself in this mess and you should just let the markets do its job”.

    firesale! auction off the country! asian tigers indeed – more like pussycats! don’t even understand market fundamentals etc. etc.

    wasn’t that what everyone from the City to Wall Street said? well karma is a funny thing isn’t it sir..

  4. Anonymous

    As someone who has traveled quite a but in the U.S., on business trips and on vacation tours, I am dismayed with all the new regulations that make such trips psychological and physical very uncomfortable.


    –The U.S. will pick up at least 15 personal data entities about someone coming from Europe through the flight operator. It will keep that data for at least 15 years and may distribute it to who knows who.
    –The traveler will have to fill out some some stupid from on a U.S. government website at least three days prior to boarding the plane.
    –On arrival the guest’s laptop may be seized without cause and without knowing when, if ever, it will be given back. Data on a mobile phone or memory sticks may get copied.
    –Also on arrival fingerprints will be taken and checked against some mysterious database. Soon the same procedure will apply when the traveler leaves the country.
    –The newest idea in Congress is to charge some $25 entrance fee to the U.S. Guess what for … to promote foreign tourism to the U.S.

  5. Anonymous

    Hold on a NY minute… Did someone give Mr. Bernstein the finger??? In New York??? I’m shocked…!!! shocked!!! I tell ya…

  6. peterthepainter

    why would anyone want to go there? it’s bad enought traveling anywhere but queuing to get through airport security?? I was there in 1973 and it took one hour to get allowed in at 04 OO am OUR time. Venice IT – now thats what I call ace! – no cars!!!

  7. Anonymous

    Combine the fact that tourism is way way down with the fact that the hotel operators are in the midst of a huge construction blowup of massive proportions.

    I still can’t figure out the logic behind that move.


  8. S

    How exactly do youa rrest then decline nin housing? PEOPLE CAN NOT AFFORD THRE HOUSES!!!What is it about this factb that is so difficult to understand. Prices are going to fall, deal with it. Owners that shouldnt be go back to being renters (whihc they were anyway) and those developments that blight the suberband and ex urban landscape should be eventually bulldozed. No instead wwe get the brainbtrust telling us we need 50 year mortgages blah balh blah. Becomes mroe apparent by the day that Americans really are proving to live up to the broad brush typically applied

  9. Stevie b.

    “To sit back and let nature take its course is to risk the end of a civil society.”

    My take is a bit different from -askinnybrownone- on this key rationale for more market manipulation. What the hell does Bernstein think further interference will do but postpone the evil day for a tad longer, but make it even worse when it arrives. This is how we got into this mess in the first place! Denial! We’ve been in denial for years. Why do we think we have some sort of unalterable perennial right to the standard of living to which we’ve become accustomed. It has to be …er…um…you know, EARNED. The sooner we face reality and stop taking the easy way out, the better.

  10. Anonymous


    We agree we see no correlation between house prices civility and civil society.

    To be honest, anecdotally, people are less civil in the bubbles out of a competitive and unjustifiably (thus insecure) inflated (frequently consciously so) sense of self worth. Do they really become less civil when lower prices and cognitive dissonance strike? Perhaps house owners do?How much is psychological and how much manifest? If it were all true then the argument holds for preventive action when prices are rising.

    If the thesis were true then society would have been progressing inexorably to being more civil, with just short periods of incivility as the asset/business cycle turns.

    Right now, I would be most happy if Mr. Bernstein would be civil enough to pay 1.5 million for my 3 bed in Milpitas.

  11. DownSouth

    My affluent friends here in the interior of Mexico avoid the United States as if it were the plague, even for a mere change of planes.

    They innumerate humiliating and time-wasting exercises, not unlike those mentioned above in this thread.

    Following the 9/11 attacks, a wave of xenophobia swept the United States that has not yet subsided. This was made worse by a political class that whipped up and exploited these hatreds in order to gain and hold political power. The treatment that foreigners receive entering the U.S. is one important, yet certainly not the most important, manifestation of those hatreds.

    Someone back up the thread mentioned Cuba. I think, in the eyes of the rest of the world, that is an apt comparison. The U.S. is now perceived very much like Cuba, with all its human rights abuses and dismal civil rights record.

  12. Jim Mc

    Mr Bernstein states that “Past recessions and economic crises typically developed in the business sector, where companies have a habit during good times of running to excess in inventory accumulation or in expanding employment and capacity. This time, businesses generally have been well financed and conservative in their decision-making.” True only if our consider the financial industry not be a business. But even a professional scam is a business.

  13. S

    Why don’t we propose that any company with an operating margin in excess of X need reduce that margin by reapportioning the excess (said X bps) to comp expense. The past few decades have seen an inexorable shift from labor to capital. Want to retard house prices, impose margin controls on companies. Sure companies will have less to invest in dilutive acquisitions and/ or R&D, but perhaps it streamlines the later process and makes companies more diligent about that which they deploy. Instead we get accelerated depreciation and eventually more corporate tax breaks. Not a bad thing per se, but labor isn’t seeing any benefit from this continuing evolution in corporate championing. This as the number shows that companies are increasingly paring back employment in favor of cheaper solutions and productivity (note composition of job adds over past decade). That makes the much ballyhooed correlation between higher profitability and rising employment a rather large myth. Neverthless, this will be the next accounting charde to bouy EPS in front of collapsing top lines.

  14. doc holiday

    Toto plays a key role in The Wizard of Oz. L. Frank Baum emphasizes the dreariness of Dorothy's life in Kansas and describes Toto as the only thing that brings her joy. Toto is the focus of the conflict between Dorothy and Miss Gulch and the reason Dorothy is caught in the storm that takes her to Oz. In Oz, Toto is the one who reveals the Wizard of Oz to be a fraud, but he also causes Dorothy to miss her return balloon flight. Given the prominent role Toto plays in the story, it is surprising that Henry Littlefield does not include Toto in his analysis of the parallels between the Populist movement and The Wonderful Wizard of Oz. Littlefield makes only one passing reference to Dorothy's dog in his article "The Wizard of Oz: Parable on Populism"……….>>>


  15. Anonymous

    The point of civil society being at risk is this: Those toxic mortgages were leveraged (up to 30 times) and sold worldwide thus infecting global financial markets. Thus even small fluctuations,downward, have a huge impact. Look at the bank failures.
    As the housing catastrophe continues to rip apart the US economy, so the rest of the world will follow. We have already seen food riots and hoarding in poor countries (even in the US). That kind of behavior will spread as the financial situation worsens. Had leveraging not occurred, then letting the market take its course would be the right prescription. But because of leveraging the entire global financial system is at risk.
    When the US middle class gets desperate enough they might try to take matters into their own hands. I recently view a youtube video where in the author stated “Why don’t we just get our guns and kill these people” meaning the Fed, bankers etc. (sendarope.com) I doubt that there will be a serious attempt at violent revolution in the US (remember the Weather Under Ground in the 1960’s anyone? Communism in the 1930’s)…. But it could be get “less civil”.

  16. Anonymous

    Re: toxic mortgages were leveraged (up to 30 times)

    That must have been with a conservative bank like Wells Fargo, cause 60 to 80 is far more realistic — but so what, they write it off and re-state earnings or just wait a few years to recoup losses.

  17. Mara

    The wizard should be taking it in the shorts, but he’s the only one being saved. Munchkins into the shredder.
    There is a lot of animosity toward homeowners, but they are not the ones who oversold the paper. The finance guys should be going to jail for the fraud. The shareholders and bondholders should go bust–I mean, they are the ones who want the reward for the risk, well here’s the risk part. There was a good article on WebOfDebt.com (http://www.webofdebt.com/articles/bracing-storm.php) specific to housing fraud. I look forward to more BK judges asking for the paperwork, and the trustees not having it. “Case dismissed!”

  18. Paul

    S: I don’t think legislating the share of profit that goes to labour will work when jobs can just be exported (and corporations too for that matter c.f. Halliburton)… It naturally swings back when the workforce have been squeezed dry of any remaining ability to borrow and consume. That is happening now.

    DH: Toto as blogger. I like that. I think in the olden days it would have been the press.

    I’m avoiding the USA as well for the past few years. Last time through LAX – just to change to another international flight – we waited in six lines for a total of four hours.

  19. Eric E

    Bernstein's "puzzle" about why consumers can't afford price increases is only a puzzle if you ignore the key fact about consumers' checkbooks – they haven't gotten wage increases commensurate with the expansion of the economy.

    Based on their real, inflation-adjusted income, consumers were not really able to afford the lifestyle upon which current consumer-driven industries depend. The housing bubble was all about selling consumers more debt by way of lowering lending standards on their biggest asset. Now that those lines of credit have collapsed under the massive undervaluation of risk (as was essentially inevitable for a bubble of such enormous breadth), consumers have no other money to put into the system, because as a whole, they aren't making any more more money. Yes, the food-and-oil squeeze from rising energy costs is basically a coincidence, but that squeeze would be notably less consequential if median real incomes had grown apace with the economy.

    It takes work to build and sustain a middle class through economic transitions (e.g. globalization, automation & information technology, education-centric jobs, etc.), and in our country we've abdicated this work in favor of unbridled capitalism. As a result, our middle class is falling apart – our Gini index is a testament to the basic problem. The puzzle's not really diagnosing the problem, it's figuring out effective ways to get things back in balance so that a reasonable share of GDP growth goes to people of all income levels.

  20. Anonymous

    WTF, why is Toto always left out in the rain like a forgotten dog… WTF up, Toto IS the story!

  21. Anonymous


    Your indicator for civility appears to be a youtube video.

    Can you provide data for similar videos prior to the onset of the
    housing market correction?

    Please do so also for the number of food or other riots.

    Debatably the food riots etc. are a result of the
    policies of the boom and the chosen cure.

  22. David

    That Bernstein letter to the editor (NYTimes didn’t say it was op-ed, but it was) made me worry and smile a little.

    I help build those over priced houses and wondered how do people afford these mortgages? Now I know. They can’t.

    Also, as more of a reporter than the alleged reporter Bernstein (a financial guy) I hearby report that on my recent trip to Bryce Canyon National Park in Utah, Foreign visitors seemed to be a larger percentage than before…but overall tourism is down and that many motels and hotels were close to being empty except the closest ones to the park. French and German was very common on the lovely trails down into the hoodoo red rocks and the temps weren’t bad for summer. Also a notable number of Brazilians. Surprise, not! Energy independence and social democratic policies seem to be working. And Americans seemed to be quieter, just plugging along.

    A skier told me back in the 70s that you could tell who’s up and who’s down internationally at the ski slopes by who was the loudest and brashest on the slopes. We’ll see how it is coming this winter.

    But really the first comment was ‘spot on’. Our war on Terror is just terrorizing US. Just flying domestically was bad enough. And it’s not just the US. My stepson had a miserable experience at Heathrow, and had to buy another plane ticket as a result of security delays.

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