Weak consumer spending will last for years

Submitted by Edward Harrison of Credit Writedowns.

It has been my thesis for some time that we are seeing a secular change in consumption patterns in the United States.  This will have grave implications for a world economy used to seeing the American consumer as an economic growth engine and consumer of first choice. Retail sales in the United States have fallen 10% since peaking in November 2007. Much of this decline represents a permanent fall in consumption by overly indebted American consumers.

Having finally had a chance to dissect the retail sales data from last week, I wanted to show you a few graphs which indicate how much consumption has fallen in the present downturn and what the implication is for the future global economy. But, first, I want to start with a broader discussion as to why the fall in US consumption is a longer-term change and not a cyclical one.

The Balance Sheet Recession

Numerous economies seem on there way to recovery: Germany and France, Singapore, and Hong Kong, to name a few, have all posted positive economic growth.  China looks likely to hit its 2009 growth target of 8%. But, the U.S., generally assumed to be a leader in recovery, is looking like a laggard.  Mind you, there are other laggards like Spain and Ireland too.  Why are these countries lagging?  The Balance Sheet Recession.

Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade.  He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts.  And the three D’s come into play:  a downturn leads to debt deflation, deleveraging, and ultimately depression.  The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small ‘d’ right now.

Secular inflation will be non-existent

Therefore, the problem is a lack of demand for loans not a lack of supply. The Federal Reserve can print all the money it wants. But, if there is little demand for more indebtedness, it is not going to have the desired effect of permanently reflating the economy – although it can create bubbles.

The corollary of this is that inflation will be non-existent on a secular basis. For the increase in liquidity to feed into consumer price inflation, people have to actually buy more stuff.  And that’s not what happens in a balance sheet recession because people are concentrated on reducing debt and increasing savings.

Moreover, there is a huge glut of excess capacity globally now that we have had a major fall in consumption. Producers are waiting for demand to catch up with supply – not exactly the sort of situation that makes for inflation. I should point out that capacity is not fixed – it grows obsolete if unused. So, much of the investment in manufacturing capacity in China and property in America is going to have to be liquidated eventually.

But, the economy doesn’t move in a straight line. It courses through cycles. Just as we could be entering a cyclical recovery in the middle of a depression, it is altogether possible that the Federal Reserve can produce high cyclical levels of inflation despite the secular trend toward disinflation. A lot of this is likely to come through commodity prices or destruction of the currency.

For example, while the change in consumer prices has gone negative in the United States since the downturn began…


when one strips out food and energy, it has declined much less than during the last deflation scare of 2001-2003, which caused Alan Greenspan to panic and reduce interest rates to 1%.


The discrepancy above is due wholly to changes in commodity prices.  So, if commodity prices re-assert themselves going forward, we could see a major uptick in inflation. Moreover, a fall in the value of the dollar could precipitate inflation as well.  And, finally, there is asset prices.  It is clear the Federal Reserve and the Obama Administration are targeting asset prices in order to reflate the economy. All of that stimulus can and will create cyclical inflationary forces which could be large. Nevertheless, the underlying level of demand is slack and that means secular inflation levels will remain subdued.  See my post “Central banks will face a Scylla and Charybdis flation challenge for years” for more on this concept.

This means the consumer will be under pressure

High debt and low inflation mean lower consumption growth.  It’s hard to spend more when you have a mountain of debt staring you in the face and its not getting reduced in real terms through inflation.


Look at the charts to the left.  They come from a story in Barron’s this weekend called They Shopped ‘Til They Dropped. They depict a tsunami of debt in the U.S. economy that has been building for four decades.  Even debt service levels have been inching inexorably higher since the 1980s. Clearly, the U.S. consumer is tapped out. And they are cutting consumption and reducing debt as a result.

So, for America, it is not business but consumers which are going to suffer a balance sheet recession.  In looking for evidence on Koo’s thesis, we need to look at consumption and retail sales.

Michael Shedlock recently reported on the horrible back to school sales numbers.  And Patty Edwards, a well-known Seattle-based retail analyst, was recently on Bloomberg radio with sobering anecdotal detail regarding the retail sector.  She sees no sign of an impending uptick in US retail sales and is very worried about the Christmas selling season. The audio of her conversation with Tom Keene is below (not available in the RSS feed).  It is very much in line with the balance sheet recession argument.


Shedlock’s post and Edwards’ view are very much in line with the retail sales numbers we saw late last week.  A lot of people had been looking for good retail sales numbers because they see recovery at hand.  But, the numbers disappointed, falling 0.1% from the previous month.

This puts retail sales 8.3% below year-ago levels and a full 10% below peak levels in November 2007. This is much more severe a decline than we witnessed in the shallow recession of 2001. When retail sales numbers hardly declined. In fact, on a nominal basis, they fell on a year-on-year basis only during September 2001 because of September 11th.


If one uses data both the present data series (1992 – present) and the previous data series (1967-2001), this downturn looks much more inline with the steep downturns of the 1970s and 1980s.


The key difference between then and now is the debt levels I showed you from the Barron’s article.  Let’s not forget low savings as well.

Macro Themes

One can only conclude that the asset-based economy of the last quarter century is over. It was based not just on a dubious productivity miracle but also on mountains of debt and over-consumption.  The new normal is debt reduction and savings.

What does this mean for the economy?  Here are a few macro themes:

  1. Retailers are in a world of hurt, not just cyclically, but on a secular basis.  Listen to the Patty Edwards interview.  America has double the amount of retail space per capita that it did a generation ago. This is the definition of over-capacity. When a glut of supply meets a deficit of demand, you have the makings of a very bad outcome for the stocks in that sector. This is the same conclusion that the Barron’s article comes to.  The uptick in retail shares like JC Penney (JCP), Ann Taylor (ANN), and Macy’s (M) is all due to beating low earnings estimates. As a result, Abercrombie (ANF) has almost doubled. Nordstrom (JWN) is up 141% and Ann Taylor is up a massive 350%. Investors like George Soros are selling retail (Wal-Mart, Walgreen and Lowe’s).
  2. Commercial Real Estate will feel the pain too. The Patty Edwards interview not only shows huge excess capacity in retail, but it shows that retailers are trying to re-negotiate contracts down.  They have Commercial REITS over a barrel because they can just threaten to close down outlets if they don’t get the contract price concessions they seek.  Back in January, I mentioned the fact that bankrupt anchor tenants like Circuit City  destroy the economics of malls for other tenants and create a domino effect.  So, if anchor retailers do not get the price concessions they want, they will shut down stores, creating a huge loss in income for all the other stores. Obviously, this will drive down the price of commercial real estate as there will be a huge glut of supply.
  3. Export-oriented economies need to foster internal demand growth. Here I am talking about Germany, Japan, and China amongst the major economies.  The US consumer is out of gas and these countries are too dependent on exporting to US consumers. It is not clear who can replace her.  Certainly, the Chinese government and companies are doing their level best to foster domestic demand in China, even conspicuous consumption.  But, the Chinese are unlikely to replace Americans as the new global growth engine anytime soon.
  4. The new normal is lower US and global growth. This all suggests that we are likely to see lower growth in the US and globally as a result – at least until the American consumer gets out of a hole or someone else picks up the slack.  That will likely mean we will see low-growth, short business cycles punctuated by fits of recession, all complicated by the three D’s (debt deflation, deflation, and depression).
  5. One should fear a 1937-style relapse. If you recall, the Great Depression saw a major economic uptick in the years after 1932. No one would call this a boom (see the section called “recovery does not mean recovery” in my post “Economic recovery and the perverse math of GDP reporting.”) This was only a statistical recovery in the midst of a greater downturn. Eventually, stimulus was withdrawn and the economy tanked again. Richard Koo argues that Japan did not go into a 1929-style depression because it maintained much more stimulus than the US did in the Great Depression. If this stimulus is removed before the deleveraging and balance sheet repair is complete, you get a major relapse. So, beware of deficit hawks telling us that fiscal stimulus must end to eliminate deficits.  If anything, the government’s long-term deficit outlook should be eliminated via reigning in skyrocketing health care costs.
  6. Banks will be in a permanent state of crisis. If we learn anything from Japan, it’s that time does not heal all wounds.  The Japanese tried to recapitalise their banking system by propping up zombie institutions.  That didn’t work.  It didn’t work in Japan in the 1990s and it didn’t work with Savings & Loans in the US in the 1980s. Why should we expect it is going to work now? But, team Obama has decided this is the way forward.  If and when an economic relapse occurs, the fragility of the banking system will be made manifest. Much of the so-called toxic assets is still on the balance sheet of American financial institutions. The same is true in countries like Germany, Spain and Ireland, to name a few. When another downturn hits, those assets will go bad and writedowns will drag down the weakest institutions.  This is the lesson of Japan.
  7. Liquidate zombies while providing counter-cyclical stimulus. The banking example gives a hint to the correct policy response.  It is not a return to the bubble days of the asset-based economy.  It is not creating deficits as far as the eye can see while perpetuating overcapacity.  What policymakers need to do is allow bankrupt organizations to fail and reduce excess capacity, all the while providing enough stimulus to prevent worst-case outcomes.

When it comes to US consumers, weak spending growth will last for years. Ultimately, debt levels in the US economy must return to a sustainable level. This can happen over time, which would mean a decade-long low-growth, muddle-through economy – not a terrible outcome either for the economy or for asset prices.

Or it could happen overnight through default, bankruptcy, and liquidation – a Great Depression II scenario. The policy response in the US and elsewhere will make the difference. Right now, we are headed for a statistical recovery at best. If policymakers think we are off to the races and try to normalize policy, they will be making a heinous mistake.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. Andrew Bissell

    If we follow Mr. Harrison's prescriptions, can we hope that one benefit of dragging out the contraction over 20 years, via Japan-style stimulus, will be to turn our own country into an oasis of concrete awash in un-utilized and pointless infrastructure?

  2. eightnine2718281828mu5

    One other point to consider: demographics.

    The 'pig in the python' is the late boomer cohort. Now approaching their 50's, it's time for them to start saving for retirement and spending less on doohickeys.

  3. Edward Harrison

    Andrew, my point is not to extend overcapacity in infrastructure or elsewhere, but to get rid of it.

  4. ronald

    Driving around in American suburbs is a unique experience, RV's, boats, motorcycles, ATV's, 3 auto's abound and we haven't gone through the front door and viewed the various electronic games, TV's and I don't even want to mention the kitchen. Nowhere in the world do you find factory workers,retail workers etc with this kind of toys!!!!!!!!!!!!
    Credit expansion has reached levels that only Americans consider normal, the rest of the world is happy to provide the toys but the party is over. The fact that economist have finally began to get the idea that this lifestyle is a bit overboard and not sustainable
    is hard for me to comprehend but I am glad somebody finally is getting the message. Thanks for the post!

  5. David Pearson


    There is a thin line between inflation and deflation, but I'm not sure you captured it.

    The threat of deflation in INCOMES looms in the months ahead. The dynamic is unemployment leads to falling incomes leads to falling demand/prices leads to unemployment. Japan never experienced this self-reinforcing dynamic — its CPI was STABLE at a 1% decline. We, on the other hand, face instability and higher deflation rates.

    So what about the "thin line"? If and when the Fed recognizes this dynamic, they will act. You say they cannot create inflation without causing people to "buy more". This is not true. In Latin America, central banks consistently created inflation not by causing people to "buy more", but by causing them to "buy forward". They did this by credibly promising to reduce the value of money in the future, so people went out and bought what they could in the present. You don't need more "real" demand in this scenario, just a credible Central Bank threat. Does the Fed have this credibility? I believe so.

    Inflation and deflation are simply the two available outcomes to a debt recession. They are separated by policy, not by the state of the real economy.

  6. joebhed

    Here's the thing.
    With a DEBT-money system, you MUST have more and more debt created all the time, that is exponentially, or else you will never be able to make the payments on the debt that has already been created.
    Since all money is created as a debt, and since we need more money to be created in order to keep up the payments, and the appearance of economic activity, it is essential to keep creating more debt.
    The debt-money system, that of the parasitic fractional-reserve banking, does not run in reverse.
    We cannot afford to pay off our debts. Each payment will reduce the amount of money available.
    Thus, the debt-deflation spiral.
    Read Modern Money Mechanics again.
    And Steven Lachance's How Debt Money Goes Broke.
    We need a new money system.
    The Money System Common.

  7. run75441


    Hmmm . . . payroll wages for 98% of the US population have done what since 2001??? They have either been stagnant or decreased, so of course people are going to spend less as the economy nose dives. They are over extended as some key expenses have out paced wage growth.

    Didn't Dr. Elizabeth Warren do a presentation on "The Coming Collapse of the Middle Class?" It appears to be a bit relevant right now.

    With the growth in profits and increased efficiencies in business, little has trickled down to the wage earners. Business has reduced labor rather than reward it with increased wages or paid time off.

  8. Anonymous

    Excellent, concise and well written.

    A couple of comments:

    You mention that it is worrisome that people are saving, yet it seems to me this is exactly what they need to do, though I understand your reasoning. So, we have a built-in contradiction embedded in the economy.

    The key here, as I believe you indicate, is overcapacity. The flip side of this is over consumption in the US. As far as China increasing domestic consumption, some like Michael Pettis are doubtful that this will come about, at least in the foreseeable future. Same would apply to the notion that the US will obtain sustainable recovery by way of exports.

    Both the US and China are attempting to revive the global imbalances that got us in the trouble in the first place: revive consumption and expanding exports. Is it not the case, then, that US attempts to increase consumer demand by way of expanding the fiscal deficit mistaken?

    As for price inflation: should prices go up for things needed, such as energy and food, then would not that reduce spending elsewhere, for discretionary items, thus reversing any "recovery" gains?

    How is it that prices for commodities will continue to increase to the point of stimulating inflation, while demand is in decline? I assume this would occur only because the "liquidity" made available by the Fed/government looks to commodities for a home, i.e., speculation.

    Lastly, referring to D. Pearson's point, I doubt very much that people will be responding psychologically to price inflation by spending in advance, for their incomes permit only so much. Seems the real world will take precedent over Fed attempts to engineer behavior.

  9. "DoctoRx"

    Ed-Welcome back from vacation, and thanks for the comprehensive and thought-provoking post.

    One of my few disagreements with your comments is your call for the Feds to rein in health care spending.

    As a retired cardiologist, I could on for years on this. Simply put: this is a tar baby for any elected government. The only semi-easy fiscal and political way for American governments to handle health care costs is to spend "X" and no more than X, such as on the poor and catastrophic policies for all; and let people spend above "X" a la Britain to their own satisfaction.

    And if you were thinking wage and price controls, then I think of the success of Richard Nixon and characters from other countries.

  10. tom a taxpayer

    Excellent article, Edward Harrison! The mountain of U.S. consumer debt is a crushing burden. Yet, U.S. govt is intent on enticing the consumer to go deeper into debt.

    The Cash for Clunkers has the govt (taxpayers) spending $3,500-$4,500 per car to encourage many car owners who had paid off their car loan and had a good car with years of useful life to buy a new car and go into major debt again.

    Scrapping cars years before the end of their useful life is the height of profligate and wasteful consumption. "Clunkers" is a terrible misnomer, hiding for the most part a perfectly good fleet of used cars. The thousands of pounds of energy-intensive, highly-processed materials and advanced engineering equipment in cars is an enormous investment based on massive inputs of energy, mining, water, labor and materials. It makes no energy, environmental or economic sense to destroy the car engines and render the investment useless years before the end of their useful life. "Cash for Clunkers" is a net waste of the environment, including energy resources.

    By disabling the engines and scrapping perfectly good used cars, the "Cash for Clunkers" program is hurting the used cars dealers and the poor and moderate income folks who can only afford used cars. The "Cash for Clunkers" is largely benefitting the haves and hurting the have-nots.

    The govt (taxpayers) is taking on more debt to encourage the consumer to take on more debt to carry out the mindless destruction of productive assets. This "wildly successful" govt program is a sign that things (including consumer and govt debt) are going to get a low worse in the coming months.

    On August 10 at the Clean Energy Summit in Las Vegas, former President Bill Clinton said the "Cash for Clunkers" program worked like a dream and should be extended by giving car buyers $10,000 to buy electric cars. Clinton said "it proves that the American people will bite if it makes good economic sense."


  11. Hernan El Perro

    To add to David Pearson comment above (I appreciate your moderate, but honest and frank, well reasoned posts I've enjoyed in a couple sites), I am a Latin American living almost a decade now in the US and I can assure you that no major inflation will happen here in the US unless people's wages and incomes are indexed to inflation too by federal mandate (and companies in the private sector are able to pay them). You are right that, much like in countries like Argentina or Peru did, central bankers (the Fed in the US) by increasing liquidity using very unorthodox methods like QE, can try inducing inflationary behavior by their signaling the impending destruction of the purchasing power of the currency. Major Devaluation (a not so out of the realm of possibilities these days but I doubt a bit would happen this year in the US) is also a not necessary, but important contributor, and as Ed says I see the efforts of the administration (and Wall Street IBs supported by the Fed) to provoke speculative behavior, first in market agents, and then by contagion in average people, but it is not working thanks (?) to major ongoing wage/income deflation. Speculative behavior was a very important starting point in Latin American hyperinflationary situations and very few analysts here have mentioned it (possibly because you guys do not have the type of real life experience we had to go through down there); speculative behavior that eventually led to self-reinforcing advance purchase behavior was posible in Latin american hyperinflationary economies because there was real, or perceived to be real, lack of consumer products too (many producers went out of business or rationing ensued as a consequence of price controls enacted by the government in a futile attempt to reduce/curtail price inflation); I don't see that happening here in the US, where excess capacity is actually a counterforce to the potential lack of real supply of consumer goods (and I am talking here about main staples like groceries, fuel and other main necessities). So after a year of trying to figure out which would come now, major deflation or inflation, I tend to agree with the deflationary forecasters. Has the US ever before indexed wages/salaries at the national level by inflation??? Could Obama do it, or would Obama do it? Can Treasury or the Fed or any other federal agency just sent continuous "tax rebates" type funds to people like that? do the powers that be want that? As a South American, I can only see with horror (like deja vu) how the US economy has slowly turned into the worst of the worst of what we had under the most mediocre of presidents like Garcia in the mid-80's in Peru. And to the good doctor in the comments that believes we don't have a serious health care problem here and that we can just live it to the markets to sort it out, I'd recommend him to check this article and see how obesity (which I believe not by coincidence developed in the last 25 years here, just as the parasitical consumer-credit based economy took off) should be attacked as a national economic (and social)priority (I saw Michael Milken in a special on CNBC a couple weeks ago and he was right in that obesity is a major social problem impacting all spheres of human development in the US, and a logical consequence of the erroneous social, tax, and economic policies of the past 25 years in the US)


    I do hope that, if the US indeed suffers the same fate of all previous nations that went through credit collapses and "loses" a decade of easy but unsustainable "growth", at least finds a way to dust itself off and recover the qualities that made it the mecca of people that wanted to pursue the true American Dream of becoming the best free man you could be and join the home of the brave. I am doing my job by starting up a couple non profits devoted to helping in the process of restructuring the economies of households and enterprises, and educating people to thrive in the new frugal sustainable green society.

  12. Anonymous

    A president stumping for health care (cough) masks Medicare being underfunded more than SS. A diversion to cover for previous failings.

    Until the core is fixed and I don't mean building a strong foundation on sand, decades of paying down debt will accomplish very little.

    Consumers understand they can only afford so much unlike the government.

  13. Richard Kline

    EH: "[Barron's article] depict a tsunami of debt in the U.S. economy that has been building for four decades." This is a point I think much underappreciated in discussion of present policy response to the financial crisis and the attendant economic contraction. This is the culmination of forty years, give or take, of wildly inappropriate policy, saliently a misvalued currency, a secular decline in real production, a failed macroeconomic strategy, and the favoring of financial speculation over production. All we have seen from the end of Dubya II and the beginning of Bo Prez I is an attempt to reanimate this matrix of failure. Even supposing that stimulus and muddle-through 'work Japan style' [they won't], the best outcome would simply be to briefly revive an economically suicidal paradigm that works, when it works, for 3% of the population and only buries everyone else deeper. I invite everyone to bear that in mind.

    Regarding overcapacity, both in the US and globally, yes, we have it: it's a disease, and as with you Ed I think the cure is a permanent change of diet. 10% reduction isn't enough; consider 15+% for something that might be sustainable. This 'growth' cancer globally is unsustainable. We have to come up with a more realistic if politically far less attractive balance of consumption-production-resources. So I am all for a _permanent_ reduction in capacity, and a re-think in how we are going to employ people to live a quality life. Be it said, our societies are sufficiently rich that we can all have a good quality of life, but not so rich that we can afford the massive engorgement or resources and capital flows by the top 3-10%. This is the rub, the political economic issue not on anyone's mind but which should be: we cannot afford our wasteful rich _and_ have the rest of society have a reasonable quality of life in a sustainable fashion. Ergo, either we need to get used to poverty for the bottom 70% with wealth for the few, or choking off the parasitical top end. Which does not mean that the consumption of the middle or the bottom end is 'more valid' that that of others, no. There is, however, only so much sugar to go around. Think about it, even if that means turning off American Idol and Faux Spews for the half of an hour.

  14. Stevie b.

    Ed – great post and I agree with David Pearson to the extent that IMO the PTB will never allow deflation of any consequence to take hold for any meaningful length of time. I'm sure "they" will come up with all sorts of wizard wheezes, not excluding negative interest rates. And it's not like the US will be ploughing a lone furrow – every developed economy will be at it in a currency race to the bottom, which will -eventually- mean higher basic raw resource prices for us all…

  15. Richard Kline

    Then there is this putative 'saving' on the part of consumers in the US. Not happening. When folks pay down debt, it statistically appears as saving: that is what is happening. No one is rebuilding their capital position, they are trying to chip away at their debt position. 3% paid down in a a year, but we also have widening unemployment, and moderate declines in wages even for hours worked. Consumers are going to be at this FOR YEARS, you're exactly right, Ed. There is no recovery at all in Consumerland. All we have seen is an inventory bounce, much of which quite obviously has benefited not the US or its consumers/workers but exporters—Germany, China, Hong Kong, Singapore—exactly as should be expected and was argued for by some of our more prescient commentors a year and more ago. Plus a purely bear market equities bounce goosed by the steroids of chicanery abetted by official connivance. I wouldn't even call that a 'recovery,' just continuing addiction with a better liar's face put on for a quarter or two.

    And supposing that we string this out through a 'lost decade'—wait, it won't be a lost decade for the 3%. They have permanent backing/funding access from the government, and opportunities to use liquidity for speculation and self-enrichment. The rich can, and will, continue to get richer through any putative lost decade because they are parasitically grafted onto the public fisc, the only source of real financial gain to look forward to. That ugly reality aside, ten years from now when consumers might gradually have arrived at a place where they can over-consume again sans the worst of their debt we will face demographic issues whereby a large chunk of the most affluent part of the middle class will be retiring from production, reducing consumption per force, and drawing down heavily on public funding supports. There is absolutely nothing to look forward to for 70-80% of the public but continuing to shove their muzzle against the grindstone while the 3% embedded in the public financial flow like a host of ticks sucks down what there is to make away with. Not to preach class hostility or anything, but this is the future suggested by the structural issues of the present. Just think it through.

    Dave Pearson, the Fed could in principle try to force credible inflation threats upon us: they won't. They do not operate in a vacuum you see; or perhaps you don't see, but I suggest this to you. They operate in a global economy. If they try to induce inflation in that way, they have an excellent prospect of blowing up the currency, something which I do believe that is understood in their halls and retreats. Something to consider as well as that fact is this. We have some recovery amongst export-focused national economies. Now that is going to sag again as the US passes through its inventory rebuild, but the point we see is that while we have a 'global recession' now, recovery potentials are not equally distributed. Those without huge debt overhangs have the potential to grow going forward. Oh, not at the level they did before, but real growth as opposed to eating deficit souffle for a few quarters, all hot air, no calories. [cont., I re-a-all-ly hate that 500o character limit, Yves m'friend.]

  16. Richard Kline

    But the real issue for these places will come in, say, 18-36 months, when the true extent of the continuing debt burden and failed macroeconomic strategy in the US is knowlegably forced upon other players. At that point they will have a choice: remain tied to us Americans and our cement Converse footwear or refocus their growth potentials _trading with each other_. Whether that latter outcome will happen I couldn't say, but the choice of it will be evident. That is the point we need to fear global reconsiderations of the place of the dollar and the US economy. If we go back to overconsumption so that the rest of the world can make good money helping us stuff our faces, they might well do so. If we can't, and likely we can't, they can be expected to tilt away from dollar-dependence. —But our 'permanent deficits' and long-term unsustainable debt position will not magically disappear. Far more likely, they will implode on us. We should prepare, and change course, but of course we will do no such think: the domestic politics and the visuals are bad, and political courage is something Americans are obviously no longer capable of.

    And Hernan el Perro, thanks for the summary. I agree with all that you say, both of the past Down There, and of the irreplicability of conditions for true hyperinflation in the US at present. We will have real inflation risks when we hit the crossover point on continuing massive deficits vs. the recovery of change in the rest of the world, but aren't likely to get a domestically induced hyper-spiral. Or that seems among the least likely outcomes anyway.

    And this Medicare nonsense: it is politically palatable to craven liberals wanting universal health care to talk about "wringing savings out of Medicare," but that argument is both ludicrous and insulting. Medicare has long been _underfunded_ even for what it is mandated to to going forward, and in fact is fairly cost-efficient now. This is just political haymaking pandering to the 'wasteful government' meme which should be whacked in the ass with a nailstudded club rather than appeased, frankly. The waste come primarily from the grossly expensive and unhelpful insurance industry, which has intermediated itself in the health care system with catastrophically bad consequences for the rest of US society, both as individuals and collectively. The way to reduce 'waste and inefficiency' in health care delivery in the US is exactly to cut _private profiteers_ OUT of the system. The provide nothing good but hog huge sums of money for the privilege of 'being there.' But that is exactly what we do NOT hear, firmly, from Bo Prez and the cowering midgets calling themselves 'leaders' in Congress. We will get no savings in the health system unless we make cut wasteful private business out of the loop. But they are the strongest lobbies in the country after the financial 'services' industry, and own more Congress malefactors than anyone. Our 'debate' on health care reform is so perverse in its language its clear that the American political process is an active danger to its citizenry. *sigh*

  17. Anonymous

    Richard Kline,

    Your faith in government is touching. So touching in fact, it's patently obvious you never worked for one. I did–the U.S. one, and saw it from high level, firsthand, for a decade.

    I assure you, whether you believe it on not is your business, that the U.S. Government does little well and absolutely NOTHING efficiently. If private industry is capable of doing the job, they invariably run rings around the government because they are more focused, more efficient, and less hindered by political correctness and unfireable deadweight. Want to see REAL obesity? Look at some of the U.S. Government workers. THEY'RE a real load.

    Our medical system is expensive because we have a lot of defensive medicine in it and we take care of a lot of people who don't pay for the services they receive. A lot of them are illegally here in the first place. Add the cost of defensive medicine dictated by the outrageously high cost of malpractice insurance and you have what we have now.

    Get the government out of American health care entirely and enact reasonable tort reform and you'll see the costs drop astronomically. Markets work, sometimes slowly and erratically, but better than government interventions do.

  18. Anonymous

    Many commentators assert that Cash for Clunkers merely brings forward future buying, thereby leading to a re-collapse of sales when the program ends. They also tell us that deflation retards purchases as consumers wait for lower prices before buying (and, inflation has the inverse effect).

    Why is one bad but not the other? If moderate CPI is "good' for the economy since it brings purchases forward, why is Cash for Clunkers bad since it does the same? (ignoring issues about taxpayer money")? I don't recall ever reading an article about how price inflation will mean that no one will buy pizzas, cars, or toys next month or next year.

    And so with deflation. I might defer my purchase for a brief time, but I won't wait forever.

    Our present economic model is not built on inflation/deflation anticipation but simply on greed, stupidity, debt, and overconsumption. No matter how many clunkers programs or how little inflation, the party had to stop.

  19. Siggy


    Nice post and very much to the point of what the problem is now and that which is coming.

    As a society we need to pay down debt as rapidly as possible. That will mean a very large contraction in employment which is now ongoing. That will also mean lower prices for the excess inventory of goods and capital assets. Deleveraging means deflation and that process is not all bad. The process is necessary, the real problem is how do we retrian the unemployed, how do we adjust living standards?

  20. Terry

    Thank you, Ed. This article is so on target and well-supported I don't see how the MSM and WS cheerleaders can think otherwise…

    …but they're paid to be cheerleaders, not analysts/economists.

  21. curious

    I beg to disagree with the above former government worker. I have been a federal employee for two decades, working for one of the national laboratories. And over and over I see that we do just about anything for 20% of what a private contractor charges Uncle Sam for the same work. People at t his lab are not perfect, but there's far more competence and hardworking energy here than at any of the several large and small private engineering firms I have worked for.

  22. David Pearson

    Hernan El Perro,

    I am Latin American too…

    That's one reason I chuckle when people say the government can't create inflation when you have an output gap.

  23. Anon1

    Want to save a boatload of dollars on healthcare? Eliminate drug patents. It isn't just useless middleman insurance companies that are the reason for high costs – it is the thieves in Big Pharma.

    As for for-profit insurance: why do we need CEOs seeking bonuses and shareholders seeking maximized dividends that MUST come at the cost of NOT covering people/dropping coverage when they get sick? The ONLY way to make money in the health insurance scam is to demand money-for-nothing by collecting ever-increasing premiums and dropping coverage the instant you actually NEED the coverage).

    There are also VERY viable and cost-effective strategies for developing new drugs without drug patents. Big Pharma would then become little pharmas that produce NEEDED drugs (rather than "me too!" drugs or copies of copies of the same old drug) for a fraction of the present "cost". You DO realize that most of Big Pharma money is wasted on marketing to people who have no business being marketed to? That would be we the NON MD public who cannot self-prescribe.

    Eliminate drug patents, paying for research via government vehicle (grants via REAL science) for needed drugs (no more me-too clones) and ban advertising to the general public.

  24. Anonymous

    The no lobbyists pledge didn't last long as soon as reelection committees lips started turning blue the lobbyist were right back where they wanted to be.

    The lobbyists write legislation and Congress votes on it, no conflict of interest there.

    How long can underfunded and deficit entities be allowed to exist? In the free market they wither and die. Really Kline.

  25. Edward Harrison

    Hi everyone, sorry for the late response. I have been away for most of the day. But, I am glad to see the most motivated some good commentary. Let me respond with a few thoughts of my own as well.

    Anonymous felt I was saying "it is worrisome that people are saving." But, it isn't worrisome at all. It is exactly what we need. The US has been on an unsustainable course for some time. The problem is the paradox of thrift, meaning that if everybody starts saving more at one you get a consumption shock that brings deflationary forces into play. This is what we are seeing. To stop a spiral, counter-cyclical stimulus is warranted.

    I should also point out that demagogues, racists, warmongers and populists of all stripes come out of the woodwork in depressionary circumstances. I will be writing a post soon I imagine discussing how the debate in health care has shown this to be the case here in America. Depression has more than just economic ill effects as the 1930s showed.

    DoctoRx, I love your comments – always. I take your criticisms about health care seriously. I bet we agree more than disagree. A single-payer system will ultimately solve many of the problems we have for employer-based insurance, but your thoughts in regards to medicare seen right on the money. Health care is a political debate more than an economic one and I wade into it very cautiously. I have lived in a number of countries including Britain and I had private insurance but used the NHS system. Absolutely wonderful experience for me and the whole family. So, the concept that America's system is unequivocally better is false propaganda.

    tom a taxpayer, relation and unbalanced living is the Team Obama solution. They want to return to an unsustainable status quo. Their policies have been a true disappointment.

    Richard Kline, well said.

    Stevie, eventually a debasement of currencies will enter the picture. The Swiss have tried it, Iceland has done it. Only when a larger country like Britain does, will a competitive situation come into focus. While the Greenback is a weak currency, it may only be weak against gold and commodities (ergo the cyclical inflation).

    Question to everyone: where is this recovery headed? It is not altogether impossible to get 18-36 months of technical recovery here and then a relapse.

    Anonymous, why isn't tort reform on the table? Perhaps Team Obama has a vested interest in it's not being on the table? Very disappointing.

    That's it for now. Again, thanks for your comments.



  26. Ben

    Your blog consistently produces insightful info. If you'd mind your grammar in your posts I think it'd be even better!

  27. Hugh

    I always like good posts backed up by charts. You ask where is this recovery headed. I guess for many of us the response would be, what recovery? With high unemployment, high debt, stagnant to falling wages, low consumer spending, a bad housing market with plenty of overhang, and a corrupt, unreformed financial sector, the only place that increased demand/consumption can come from is the government. The problem is that across the board our political leadership is ignorant, in denial, or ideologically opposed to any kind of effective and directed spending program. As I often say, Republicans are just crazy but the Democrats and Obama aren't far behind. Trillions have been wasted trying to reflate bubbles and prop up crony capitalists and their bankrupt companies. And this has happened under both the present and previous Administrations. In short, our political elites are not up to the task. So it isn't just that we have the worst economic and financial situation since the Great Depression. There is no FDR or Pecora on the horizon.

    I see 3 distinct periods before us. The first is to the end of the year and the question here is at what point will the suckers market head south. When it does and how it does will determine just how bad a winter we are likely to have. The second is next year when more of the stimulus is supposed to kick in but this will be offset by continued high unemployment, collapsing state budgets, and a worsening mortgage picture. The question here is whether the government will intervene with more stimulus. If it does it will have to be huge to make headway against the mounting problems in the economy. And as I said, I don't see our political leadership really up to it. They will probably do nothing, certainly dither, and if they do do something, it is likely to be too small and misdirected like their previous efforts. The third period is 2011 when the original stimulus will be largely exhausted. The jobs from it what few there were will largely disappear and my best guess is that we will be looking at real depression.

    If there are any progressive or better government types out there now would be the time to start organizing to take advantage of popular and populist discontent in 2012.

  28. Richard Kline

    Hugh, I agree with all you say.

    So Anon of 5:01 and 1:36, I'm relieve to know that my tax dollars are no longer being expended on the dubious purchase of your employment. Dubious, given the quality and tenor of the 'thought' demonstrated by your remarks. As Curious manages to point out, government often returns comparable service at a small fraction of the cost of private replacements: that is why government took on such tasks to begin with, the historical reason but obviously you're not one to look at the facts. That you didn't manage that kind of productivity strikes me as unsurprising.

    And those putative and real illegal immigrants? Those ones who _seldom seek health care here_ because they are in fact worried about immigration so are in serious health difficulties when they're dropped in an ER? Those folks are the ones using all those overpriced pharmaceuticals, not your mother-in-law? Yeah right. The crypto-rascist nativism of your remarks here, Anon, is noisome, and something symptomatic to me of intellectual failure, whatever the nominal intelligence of the speaker.

    And all those malpractice costs you would push to center stage? No one likes to sue, and effecting policy reform with torts is expensive and ill-shaped of result, sure. That said, the ability to sue in the courts is very often the only redress for most citizens against entrenched interests of wealth or privilege, nearly always the _only_ resort for those of ethnicities or other status thought 'undesirable' by some. Your inability to see the social justice component of tort action is symptomatic of your small-minded and preconceived perspective; or more likely you would be opposed to such social justice pursuits if and as you perceived them given the rest of your spew. If, when, and as we have a single payer health provider with clear and powerful grievance procedures for those receiving care, then and only then we can, and should, talk about limitations on malpractice actions—for actions taken by those compensated for service by that single payer, them only. But that isn't your argument, is it? You simply would remove the one tool most of us have, however misshapen, and leave us to 'petition' health insurers and Big Pharma on our own resource. You first, buddy.

    You would be far better of smoking that tea, pal, rather than bringing it to the party. Your condensation of complex social problems into a handful of marginally relevant right wing road-apples, ahh chestnuts, you want to lay on the table as a gift (?) for the commentariat is now 'value added' here. More likely a right-side plant to spin the debate, methinks. So I make you one guarantee: this is the last time I'll waste my precious time responding to your quasi-troll droppings. Want to be taken seriously? Get yourself a monicker rather than comment in cowardly anonymity, and build a track record of remark which shows that regardless of your conclusions you are capable of engaging with ideas and positions not pre-selected for their place in the know-nothing short list. Bye now.

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