A number of commentators including, but not limited to, Bill Gross is beginning to recognize that the economy is not going to return to the mode of the last thirty years, where ever-expanding debt fueled consumption.
Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened. We have arrived at a New Normal where, despite the introduction of 3 billion new consumers over the past several decades in “Chindia” and beyond, there is a lack of global aggregate demand or perhaps an inability or unwillingness to finance it. Slow growth in the developed world, insufficiently high levels of consumption in the emerging world, and seemingly inexplicable low total returns on investment portfolios – bonds and stocks – lie ahead. Stop whispering (and start shouting) the words “New Normal” or perhaps begin to pronounce your last name with an RRRRRRRRRRRR. Our global economy, our use of debt, and our financial markets have changed – not our alphabet or dictionary.
Bill’s piece includes a nice debt chart where one can easily see the abrupt trend change in the early 1980s that resulted (initially) from Ronald Reagan’s decision to force the Soviet Union to spend itself into oblivion. That taste of an apparently free lunch whetted the appetites of governments and private citizens alike, especially those working in finance. And then it was up, up and away. Of course, Bernanke and the other government idiots have not given up trying to re-establish this condition.
White House officials, like Christina Romer, a top economic adviser to President Obama, have been busy speaking out against the idea of a new normal. “The fundamental problem we are still facing is the old cyclical, not the new normal,” she said. “What you need to do to get back to normal is to find more ways to get demand up.”
And if we do, what then? More demand will just benefit the countries that are actually capable of producing the goods that buyers want. The U.S. has de-skilled and disinvested itself from goods production and between environmental restrictions, and just plain exhaustion, has lost much of its commodity production capability. We have all the houses and commercial structures that we could possibly need for years to come, and an immense and now largely useless financial services industry that financed their construction. And, oh yes, we have the bill for about thirty years of consuming more than we produced. A bill that we can’t pay.
Consumption is still way too high. It has to be reduced so that there are resources left over from what we can produce, after we’ve consumed what we need, that can be invested in rebuilding the country’s skills, infrastructure, plants and equipment so that real organic growth can resume. This is by no means a tragedy, but it is a profound change from the culture that thrives on the endless accumulation of “stuff” as badges of status or group membership.
When you carry forth that symbolic nature of consumer goods to the next logical step, it makes sense that people would covet the items that represent a group that they wish to be a part of. Let’s say you live on a block where many of the people drive Lexuses and your Ford pickup sticks out like a sore thumb (not that I’m in that situation or anything…). There’s a subtle social pressure to purchase a Lexus or an automobile of similar quality so that you fit in with the group on your block. Thus, advertisers often look for people who are trendsetters and get the ball rolling by focusing in on them – if two or three of the most social people in a group suddenly have a particular item, it begins to spread throughout people in that group.
Fortunately, this consumer culture is under pressure because people are starting to realise that it is a vicious and ugly trap. Even the mainstream media are picking up this theme.
Today, three years after Ms. Strobel and Mr. Smith began downsizing, they live in Portland, Ore., in a spare, 400-square-foot studio with a nice-sized kitchen. Mr. Smith is completing a doctorate in physiology; Ms. Strobel happily works from home as a Web designer and freelance writer. She owns four plates, three pairs of shoes and two pots. With Mr. Smith in his final weeks of school, Ms. Strobel’s income of about $24,000 a year covers their bills. They are still car-free but have bikes. One other thing they no longer have: $30,000 of debt.
Ms. Strobel’s mother is impressed. Now the couple have money to travel and to contribute to the education funds of nieces and nephews. And because their debt is paid off, Ms. Strobel works fewer hours, giving her time to be outdoors, and to volunteer, which she does about four hours a week for a nonprofit outreach program called Living Yoga.
“The idea that you need to go bigger to be happy is false,” she says. “I really believe that the acquisition of material goods doesn’t bring about happiness.”
The more cynical amongst us (moi?) would recognize this as the simple benefits of living within one’s means.
Unfortunately, the U.S. has along way to go before it can be said to have adapted to the new normal, that is to have returned to an economy that balances consumption and savings to generate investment which in turn yields fundamental, productive, growth. Before it gets there is must pass through purgatory, which will yield the necessary cultural and social change. European governments have already started to make this change, but then the consumption culture was never as deeply embedded there. I fear that the present administration will be very slow to make this change, and the behavior of the President’s wife, Michelle Obama, shows how distant that family is from the economic realities of today. Lavish Obama vacation in time of economic turmoil raises eyebrows:
WASHINGTON — As the U.S. economy endures high unemployment and a jittery stock market, President Obama has preached sacrifice and fiscal discipline. But the pictures coming out of a sunsplashed Spanish resort this week may be sending a different message.
First lady Michelle Obama is on a five-day trip to a luxury resort along with a handful of friends, her younger daughter, Sasha, aides and Secret Service personnel. Her office said the first family will pay for personal expenses, but declined to reveal the taxpayer cost for the government employees.
That’s setting an example for you consumers out there. Qu’ils mangent de la brioche.
Financial Reality 