U.S. consumer confidence waned in late July to its lowest ebb since April on growing pessimism about the long-term economic outlook, especially about income and jobs, a survey showed on Friday, even as some economists reckon the longest recession in decades may be easing.

The Reuters/University of Michigan Surveys of Consumers said its final July consumer sentiment reading fell to 66.0 from June’s 70.8, though it was slightly higher than economists’ median expectation for a reading of 65.0, according to a Reuters poll.

The index of consumer expectations fell to 63.2 in July’s final reading, from 69.2 in June.

“Consumers believe that the economic free-fall is now over, but consumers see little reason to believe the stimulus policies will improve their financial condition anytime soon,” the Reuters/University of Michigan Surveys of Consumers said in a statement.

On the long-term outlook, 58 percent of respondents said they anticipated bad times, up from 49 percent in May.

Lower income and less favorable job prospects in the next year are key factors making consumers anxious about their financial position, the statement said.

“People are a little more worried about the economy, especially over the labor market and what’s happening in Washington. It’s still consistent with the picture that the economy is bottoming out, but you are not going to get a big bounce in consumer spending,” said David Wyss, chief economist with Standard & Poor’s Ratings Services in New York.

The current conditions index slipped to 70.5 in the final July reading, from 73.2 in June.

U.S. stocks extended losses after the report’s release, but the dollar and safe-haven Treasury bonds traded fairly steady.

“We are going to see the stock market improve, but it has gotten ahead of itself given my expectations of a soft economic recovery. We are going to need a mid-rally correction. This (recent rebound) is the biggest rally we’ve had since the 1930s, and it makes me nervous,” Wyss said.

“Recent income gains were reported by the fewest consumers in the more than 60-year history of the survey in each of the past three months. Reported declines in income, from lost jobs, shorter work hours, cuts in pay or bonuses were also at record levels,” the survey statement said.

We may be seeing a temporary bottoming out, but are still in for a long period of ongoing job losses and little consumer spending. The recent rally has indeed been a phenomenal one, all the more a reason to be concerned about expensive stocks. To get an idea of how low consumer spending may go, please see True Consumption as Percentage of GDP:

The likely bottom for a serious recovery would here be somewhere between 86% and 90%.

Related posts:

1. Consumer Credit – July 2009 Release
2. Consumer Price Index July 2009 – Real Prices Down 6.6%
3. Consumer Credit July 2009 – 7th Monthly Contraction Straight

They’ve been dubbed boomerang kids and a recent poll by collegegrad.com shows that 80% of 2009 college graduates moved back in with their parents. That’s up quite a bit from recent years.

So whether kids are home for just an extended summer or until they find a job, its important to set up some guidelines before they settle in.

Consider drawing up a written agreement between you and your child. Outline a time frame as well as responsibilities, both financial and around the house. Some parents charge rent while others won’t even consider the idea. Whichever you choose, make sure to make clear exactly what the child is responsible for when it comes to other expenses like groceries.

Keep credit cards and cell phones separate. Johnny can pay for that himself. These are financial responsibilities your child needs to learn to take on.

But do consider keeping your child on your health insurance plan. If your health plan is employer-based it probably offers lower premiums than individual health insurance.

Twenty-five states give graduates the option to be covered under their parent’s policy, but state laws vary, so the age cutoff could be 24, 25 or 26. New Jersey has the highest age limit at 30. Check out the Kaiser Family foundations Web site at statehealthfactsonline.org to learn about your state’s rules.

The reality is, if your child is too old to qualify, you’ll need to find individual health insurance and decide who will pay for it.

Don’t forget about auto insurance either. If your child plans on driving the family car, your payments will go up. So figure out who is going to pay what.

The bottom line is, you don’t want to risk your own financial health. You shouldn’t feel like you’re on the hook for things you used to pay for when your child was younger.

Food and shelter for one extra person costs thousands of dollars each year. So laying everything out on the table ahead of time and establishing a plan of action is key.

…and one more thing to teach your kid above all: Live within your means. Don’t repeat this generation’s mistakes. Work hard, spend little, be frugal, save money, DO NOT use credit cards.

Attitudes are already changing accordingly. The recent Gallup poll shows In U.S., One-Third Still Set on Spending Less as New Normal:

The accompanying table displays by income the percentage of those saying their new normal is to spend more or to spend less in the years ahead, based on a combined sample of those interviewed in Gallup’s April and July surveys. While one might expect there to be differences in the impact of the recessionary economy across income groups, that is not the case. There is little substantive variation by income in the percentage saying their new normal is to spend less. Those with lower incomes are slightly more likely than higher-income Americans to say their new normal pattern is spending more, but not by much.

This is just another symptom of the End of Consumerism. Attitudes are changing. Attitudes emerge out of ideas. And ideas are the strongest force in society, stronger than the most powerful army. To understand the long term outlook for the US economy, a thorough understanding of the power of ideas and attitudes is indispensable.

Related posts:

1. New Study: College Students Learn Next to Nothing
2. Home Prices – May 2009 – Beginning to Bottom Out?
3. Graduating in the UK- A Record 70 Applications Per Job on Average

Vice President Joe Biden told people attending an AARP town hall meeting that unless the Democrat-supported health care plan becomes law the nation will go bankrupt and that the only way to avoid that fate is for the government to spend more money.

“And folks look, AARP knows and the people with me here today know, the president knows, and I know, that the status quo is simply not acceptable,” Biden said at the event on Thursday in Alexandria, Va. “It’s totally unacceptable. And it’s completely unsustainable. Even if we wanted to keep it the way we have it now. It can’t do it financially.”

“We’re going to go bankrupt as a nation,” Biden said.

“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that’s what I’m telling you.”

…fortunately this one can be put to bed just as easily. Biden is saying we have to go spend money to avoid bankruptcy. OK, there is only one problem: This is what we have already been doing for the past decades. If he was right, then we wouldn’t have Americans going bankrupt left and right right now.

He refers to Health Care spending in particular. Unfortunately the United States government already spends more than any other industrialized nation on health:

… so we’re good there, right Joe?

And relative and absolute total government expenses have been growing for the past 60 years already:

…so we’re good here, right Joe?

And as individuals and government we have up to now been spending and consuming at levels unprecedented since the Great Depression, in fact consumption is still pretty high compared to historic averages:

… so we’re good here, right Joe?

It’s not that since WW2 we haven’t been diligent and thorough on consumer spending. We even borrowed money that we couldn’t afford to spend it on consumer goods, just to make sure we keep spending:

… so we’re good here, right Joe?

President Bush in particular has been rather diligent about driving spending up by more or less 100% in virtually every category, plus Obama’s budget even TOPS those expenses:

Department of Defense and international expenses (spending on wars and occupations) will go up from $666 billion to $673 billion (under President Bush it grew from $316 billion to$666 billion)

Other appropriated programs will go up from $613 billion to $695 billion (under President Bush it grew from $298 billion to$613 billion)

Social Security expenses will go up from $662 billion to $695 billion (under President Bush it grew from $406 billion to$662 billion)

Medicare expenses will go up from $425 billion to $453 billion (under President Bush it grew from $216 billion to$425 billion)

Medicaid expenses will go up from $259 billion to $290 billion (under President Bush it grew from $117.9 billion to$259 billion)

Other mandatory program expenses will drop from $673 billion to $571 billion (under President Bush it grew from $290 billion to$673 billion)

Net interest will go up from $139 billion to $164 billion (under President Bush it dropped from $222.9 billion to$139 billion)

Disaster cost will go up from $4billion to $11 billion (under President Bush it went from $0 billion to$4 billion)

So we’re good here, right Joe?

Whatever it is that Joe Biden recommends, it obviously has nothing to do with “change”.

By Joe Biden’s logic Americans should be far far a way from bankruptcy. We have followed his pathetic advice to the T for decades, haven’t we?

Who’s up for more spending? Anyone?

Related posts:

1. Obama Tries to Square the Economic Circle
2. President Obama’s Budget for FY 2010 – A Continuation of the Bush Era
3. Fixing Health Care in the US

Total consumer credit outstanding dropped to $2.5 trillion in April of 2009. This is the 4th month straight since the peak in December. It has dropped by a total of $89 billion since then. This goes hand in hand with the end of consumerism and is a harbinger of the coming and ongoing contraction in the production of gonsumer goods in the US. It is the downward side of the consumption business cycle in full swing.

Related posts:

1. Consumer Credit – June 2009 – 6th Monthly Contraction Straight
2. Consumer Credit February 2009
3. Consumer Credit – March 2009

In that post I illustrated consumer goods production vs. investment goods production in the US. I noticed that the composition of the GDP at bea.gov has one flaw: It includes so called “Residential Investment” under Investment. But what mostly falls under this category are purchases of new homes.

A home clearly does not qualify as a factor of production and it is thus a mistake to include the production of it under investment goods (factors of production). It makes a lot more sense to include it under consumption.

The percentage of consumption vs. GDP throughout history would then look like this:

The likely bottom for a serious recovery would here be somewhere between 86% and 90%.

Related posts:

1. Gross Domestic Product Q4 2009 Updates; True GDP & Consumption as Percentage of GDP
2. True GDP – Q2 2010
3. The True Gross Domestic Product

The chart below shows the development of private consumption, private investment, and government expenses in the US since 1947:

Click on image to enlarge.

The output of a country, its GDP, is approximated by adding those three components up and adding exports and deducting imports. The logic being that if someone consumed something, then someone must of course have produced it. Items exported are not consumed inside the country and thus not captured, hence they are added. Items imported are reflected in the components above, but they are produced outside the country, hence they are deducted.

Consumption expenses give us an idea of how many consumer goods are produced in the country, investment expenses give us an idea how many factors of production are being turned out (duly accounting for exports and imports).

It is completely safe to assume that government expenses can be equated to consumption. It is true that the government spends a fraction of its money on investments such as roads and other infrastructure. However, this fraction is almost negligible when compared to consumptive expenses on goods that are used up immediately and don’t aid in any production processes, such as military products and health care.

The chart below shows the development of the percentage of consumer goods production in relation to the total output, GDP from the Great Depression through now:

Click on image to enlarge.

As can be seen above, the percentage of goods produced for consumption by the productive factors in the US has historically oscillated between 79% and 98% since 1929. The average has been 86.27%.

Another way to look at it is to only look at private consumption only:

Click on image to enlarge.

It reveals a severe drop in personal consumption during World War 2 which was more than replaced with government consumption.

Where can we go from here? It is safe to assume that production of public and private consumer goods will at least fall back to the average of roughly 86%, but maybe even drop to around 80%, given the fact that corrections usually seem to overshoot that average and given the severity of the current correction.

A good indicator of when a true recovery is near will be when investment expenses stop to fall and begin to bottom or even rise again. Meanwhile, the production of consumer goods may continue to drop while employment in businesses that produce factors of production should begin to absorb the released resources at some point.

Businesses that produce this capacity may be attractive at that point. This includes in particular companies from the mining and drilling industries, such as the canadian energy trusts (examples: PVX, PDS, PWE, AAV). New AND old energy sources are likely to be explored and expanded. Alternative energy businesses, such as wind or solar energy may be worth looking into for people who understand the technological challenges that they are exposed to. Basic commodities should do well. Gold and silver should continue to act well so long as people consolidate their finances and demand cash to pay off their debt.

Related posts:

1. Consumer Credit – June 2009
2. True Consumption as Percentage of GDP
3. Consumer Credit – March 2009

Why then are investors persisting with this course of action that adds risks? Many theories have been propounded, but a clear framing of the future outlook would help to understand the sheer “courage” that is involved in buying such assets now. To make things easier, I have used a modified decision tree wherein the basic trend has been used as the title, with financial market consequences being highlighted below each such possible trend. Such an approach is provided below:

1. Green Shoots of economic recovery are for real (hahahahahaha, but let’s take these bubble-spewers at face value for now; or else read “Truth is too hard to handle”).

a. This could only be due to the US and European consumer spending money on borrowed time; yet again
b. Over the short-term that would argue for buying risky assets such as stocks and high-yield bonds and going short US Treasuries;
c. Inflation will rise inevitably, so buy physical commodities including gold;
d. Go short anything near the government bond curve including US Treasuries and German Bunds, among others.

2. We are into a Great Depression

a. The monetization of the debt cycle would have failed for this outcome to percolate to the masses in Europe and the US;
b. Financial institutions in Group of Eight leading industrialized countries cannot raise any capital from the public;
c. Forget about stocks, high-yield bonds that will fall in price dramatically just as soon you buy them for your retirement account;
d. Buy some government bonds, but only of countries that can service their future debt obligations (that is, avoid the likes of the US and pretty much all of Europe);
e. You will need to have some stuff that has real economic value rather than the worthless IOUs issued by G-8 governments, so buy some gold;
f. This might also be a good cue to buy some weapons and ammunition.

3. We will have a Y-shaped recovery (see How about a Y-shaped recovery, Asia Times Online, February 23, 2008.)

a. The US and Europe are toast, but emerging markets will do well;
b. Financial institutions in G-8 countries cannot raise any capital from the public;
c. Buy emerging market equities and bonds, sell everything else;
d. As most emerging market currencies are quite funky and don’t really fit into your wallets, you will need some gold for your travels.

My comment: I am of the opinion that #2 is the correct assessment of the current situation and that we have a long period of debt consolidation, consumer abstention, and wealth deflation before us. We are repeating the playbook from the Great Depression. Gold and silver should continue to hold the line. Government bonds should do fine throughout this period, see Time for Treasurys. Shorting commercial property ETFs in addition to that is a decent addition to any portfolio.

What the average reader thinks for himself is one thing; what he is being told by the financial media at large (and G-8 financial media in particular) is altogether a different matter. Whilst I would normally lean towards the school of an incipient economic recovery after a couple of years of any economic bust, a number of factors conspire to deny any such notion in my mind at the moment:

1. This is very much a crisis caused by excess leverage in the US (and, less so, in Europe). Until the leverage is washed out, there is no chance of any economic recovery;
2. Governments have engaged in widespread monetization of such leverage, rather than addressing the core event itself. This has the effect of actually making the future even more uncertain. For example, General Motors or Chrysler as private companies would have entered bankruptcy many months ago; but thanks to government intervention now re-emerge as worker-owned companies that couldn’t possibly get bank financing down the road (due to the destruction of creditors’ rights by the Obama administration). Ergo, this is money wasted by the government at great cost to the average US taxpayer: not exactly the recipe for an economic recovery;
3. Then there is the question of bank funding. Most analysts point to a funding gap of around US$20 trillion for the G-8 banking system by 2011, made worse by the reduced velocity of money (that is, a lower money multiplier). This problem has not been addressed, and most likely will not be; unless banks can pledge more useless collateral with their central banks and in effect get “free” funding;
4. Export-driven markets are toast, be it China or Germany or Japan. All these countries will have to reinvest in their domestic markets: some to fruitful results (China) but others to no avail (Japan). Whatever they do, it is clear what they will NOT do – that is, they will not buy more US sovereign and state-guaranteed debt;
5. Many of the weaker emerging market countries are facing funding pressures; particularly those in Eastern Europe. The resulting increase in defaults promises to fell the rest of the European banking system that hasn’t already fallen victim to the US financial collapse. This will also divert more resources from the International Monetary Fund and so on, to the expense of the G-8;
6. Increased strategic risks: think Pakistan’s ongoing fights with the Taliban, Iran’s nuclear weapons program, Russia’s anger with the North Atlantic Treaty Organization over Georgia as just a few examples of what could go wrong in the very, very near future.Based on all this, it is clear to me that the only people who could possibly believe that risky assets such as high-yield bonds and common stocks are a good buy are either the people who currently own them (and therefore will post profits when they rise in price) or those that need to get out of their positions (that is, sell their bond positions or raise new equity).

In most cases, the answer is “both of the above”, namely US and European banks who are loading up on some securities to cause artificial shortages that in turn help to raise prices of the rest of their books. These institutions have the benefit of knowing that a good trade gets them out of jail, but bad trades only result in more government assistance being lavished on them.

They aren’t playing with their own money, but rather with yours. When you are only ever going to lose other people’s money, the rules change and an entirely different “game” takes hold. That is what you are seeing now; until the final blows of economic data help to chase these fake rallies out of the market. When that happens, the biggest losers will be the people who own these risky assets like high-yield corporate bonds in the US (or Europe) and stocks of banks across G-8.

My comment: I marked the most important point in the passage above in bold. There is no end in sight for the current correction of this business cycle so long as the bad debts on balance sheets remain overvalued and uncorrected. For a good estimation of how long this may take, we can take a look at a recent report by the San Francisco Federal Reserve Board, titled U.S. Household Deleveraging and Future Consumption Growth:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

The report concludes with the following outlook:

Conclusion

More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

My comment: My word exactly. I call it The End of Consumerism:

We need to respond to the reality around us rather than deny it. It is time to cut back and restore sanity and balance. Individuals have realized this and are doing the right thing. The government has not understood this fact at all. It is trying to keep alive failed businesses that should release resources for more demanded projects. It is trying to make up for the “lack of consumption” in the private sector. All these attempts will fail miserably. All they will accomplish is to slow down the corrective phase and turn it into a decade of agony.

Related posts:

1. The Great Credit Contraction & Deflation
2. Consumer Credit in June 2010 – Contraction Continues
3. Total US Credit and Loans – How Much Contraction Since Peak?

Click on image to enlarge.

When looking at the chart above one might think that this might as well be just another ditch like the ones that usually followed December.

But one has to realize that the chart above starts at 2001. From 2001 through 2007 the American attitude was consistently biased toward more and more borrowing and more and more spending.

But these attitudes have changed. The end of consumerism is not just a temporary recessionary ditch. It is a fundamental shift in psychology and attitudes that can carry on for a very long time.

When looking at the long term chart of consumer credit, one gets a better picture of where we can go from here, assuming that this consumer cradit bubble that started in 1993 has burst:

Click image to enlarge.

Simply put: I think the roller coaster has reached the top.

Related posts:

1. Consumer Credit Drops – January 2009
2. Consumer Credit – July 2009 Release
3. Consumer Credit Volume Drops Again

They exchange consumer goods on the market against money obtained from consumers. They exchange factors of production against money obtained from other entrepreneurs.

Factors of production, once completed at some point in the future, enable entrepreneurs to produce more consumer goods during the same amount of time. But while factors of production are being built, workers and natural resources are being used in processes that don’t turn out any consumer goods. It is thus necessary to only employ workers and resources in the production and maintenance of factors of production to the extent that during this process individuals in society are willing to not consume the full output of their labor, and hence generate savings.

On top of that, it is necessary to maintain the existing stock of productive factors, lest their wear and tear cause a decline in the output of consumer products. Thus a continuous level of savings needs to be maintained by individuals in society.

Interest rates on the market give entrepreneurs an indication of the market participants’ time preference, meaning how much immediate consumption people are willing to forgo in exchange for the prospect of more future consumption. In other words, interest rates give an indication as to how much people are ready to save and thus contribute to the maintenance and new developments of factors of production.

If the the government pursues a policy of business credit expansion, the interest rate indicator is manipulated by force, as opposed to voluntary individual time preferences. The interest rate drops below the level that represents those actual preferences. If mostly consumer loans are pushed, the consumption business cycle ensues:

The Consumption Business Cycle

The central bank and fractional reserve banks create new fiat money and make it available in credit transactions to individuals who intend to use the money for the purposes of consumption. Examples would be car loans and home loans which made the US economy align its productive factors accordingly over the past decades. It is likely, but not necessary that interest rates for such credit instruments will drop initially.

Some individuals may now enter into these new credit transactions and use the new money to consume goods that they wouldn’t have consumed before. But they didn’t do so by reducing their savings, nor did anybody else sacrifice consumption to make this money available. It was created out of nothing. No additional consumer goods have been produced.

The prices for the goods demanded will begin to increase. Entrepreneurs will respond by abandoning the production of some additional factors of production and turn out more consumer goods instead. So long as more credit is channeled into the system, prices will continue to increase while entrepreneurs try to catch up. Fractional reserve banks will begin to earn more interest revenue and expand their operations and resource usage.

Businesses that produce consumer goods will report higher profits, while profits for businesses producing factors of production and basic materials will lag behind. A myriad of consumer goods based businesses will spring up over time. The alignment for immediate consumption vs. more/better future consumption continues so long as individuals continue to be able to pay interest on the credit transactions performed and expect to be able to do so in future.

But as explained above, making interest payments and paying off debt is only possible in the long run if the workforce, as a whole over time, becomes more productive per unit of labor. But the opposite occurs. Productivity per labor unit will be lower than the additional consumer loans appeared to indicate, since in an unhampered system credit can only come out of savings (which means someone somewhere forgoes immediate consumption, making room for more factors of production). After a certain period, the amount of debt and interest payments will become higher than consumers can afford. In addition, due to lower interest rates, a lot of rather risky loans were made to individuals that would not have occurred in the unhampered state. Individuals will begin to default on their interest payments.

They start realizing that they need to consume less and save more in order to not have this happen again. Their demand for additional credit drops sharply. Their demand for money to pay off the debt and/or generate savings rises.

The fractional reserve banks will begin to slow down the creation of additional credit. They begin reporting losses on existing consumer debt.

As excess consumption comes to a halt consumer prices begin to fall, businesses aligned for the production of consumer goods will see declining profits, some will start reporting losses. They realize that they will have to abandon some projects since the demand for consumer goods starts to fall back to sustainable levels that match everyone’s time preference and expectations. The desire to consolidate one’s finances takes priority over everything else.

This is what is currently happening in the United States. The end of consumerism really means the end of capital consumption. It means that people realize that they need to save more and consume less, so as to provide for economic progress and more efficiency in the future, and to restore balance to the economy as a whole. It means that people have understood that too much of the existing capital stock has been consumed and has deteriorated.

This is the causality that the majority of pundits and economics professors that one can hear talk every evening on the news simply don’t understand. All their theories and policies are ignoring this one crucial fact: That Americans are done consuming for the foreseeable future. The end of consumerism isn’t just a temporary ditch. It is here and now and it won’t go a way for a long long time. It is a once in a lifetime occurrence. This is why it is so hard to grasp and to accept. But it is very simple to understand when one approaches it with sane common sense. How many more Starbucks branches do we need in the streets of New York? How many more gas guzzling cars should each family posess? Three, four, ten …? How many more different brands of detergents, shampoos, toothpastes, and consumer electronics products do we really need?

Now, it is important that the reader doesn’t get this wrong. I do not oppose consumption. In fact, the entire material wealth of a person is ultimately determined by how much he can consume. Consumption, present or future, is what all humans ultimately work for. But if, in an environment of government induced credit expansion, people consume more than is sustainable in the long run so long as the music still plays, they need to cut back for a certain period once the music stops playing. If we had never embarked on the disastrous path of credit expansion and government intervention, if all factors of production were allocated as efficiently and effectively as possible, if the government had confined its scope to the protection of each individual’s life, health, and property, we would today be able to consume a lot more than we currently can.

Unfortunately this is not the situation we are in here and now. We do not live in a perfect free world. We need to respond to the reality around us rather than deny it. It is time to cut back and restore sanity and balance. Individuals have realized this and are doing the right thing. The government has not understood this fact at all. It is trying to keep alive failed businesses that should release resources for more demanded projects. It is trying to make up for the “lack of consumption” in the private sector. All these attempts will fail miserably. All they will accomplish is to slow down the corrective phase and turn it into a decade of agony.

Related posts:

1. The Business Cycle
2. The Business Cycle Revisited
3. True Consumption as Percentage of GDP

Beer, it seems, is no longer what’s for dinner.

The chart that follows details the quarterly change in alcohol purchased for home consumption, adjusted for inflation and dating all the way back to 1959. We can compare this against the quarterly change in real GDP:

As you can see, there has generally not been much of a relationship between alcohol purchases and changes in GDP — the correlation is essentially zero. Nor have alcohol purchases historically been any kind of lagging or leading indicator.

But something was very, very different in the fourth quarter of 2008. Sales of alcohol for off-premises consumption were down by 9.3 percent from the previous quarter, according to the Commerce Department. This is absolutely unprecedented: the largest previous drop had been just 3.7 percent, between the third and fourth quarters of 1991.

Beer accounts for almost all of the decrease, with revenues off by almost 14 percent. Wine and spirits were much more stable, with sales volumes declining by 1.6 percent and 0.9 percent respectively.

Now, there are several plausible explanations for this. Alcohol sales — but particularly beer — had been on something of a hot streak prior to the 4Q, so perhaps there was some reversion to the mean. Perhaps people are substituting Michelob and Coors for more expensive microbrews like Alpha King and Dogfish Head. (This is unpatriotic, by the way, since all the macrobrews are now owned by foreign-based multinational conglomerates. Stimulate your country — and your tastebuds!).

Perhaps retailers are discounting their prices, or brewers are passing along cost savings to their consumers (there had been a hops shortage for much of 2007-08). All of these are probably factors to some extent or another.

Nevertheless, it’s absolutely startling to see a major consumer staple experience a sales decline like this.

It’s not just beer, either. Sales of jewelry and watches were off by 7.2 percent in the fourth quarter, the third-largest drop ever recorded. Casino gambling receipts are down about 8.5 percent from a year ago, far and away the largest decrease ever over four consecutive quarters.

What’s doing well? The movies. The movies, also historically a recession-proof industry but not a counter-cyclical one, are doing terrifically well. Motion picture theaters increased their revenues by 10.9 percent in the fourth quarter, according to the Commerce Department. But the movies are not typically seen as extravagant. You don’t feel guilty after purchasing a movie ticket; you feel kind of wholesome.

I can’t escape the feeling that there’s something rather Weberian about it all: a manifestation of Calvinist guilt over both the present failures of the economy and its prior excesses. A deliberate effort to deny oneself pleasure.

Conspicuous non-consumption.

This is relevant because it simply shows the sheer magnitude of the changes of consumer behavior in the US. This is not just a little ditch in consumption. It is a seismic shift in consumer philosophy. Frugality is the new credo, all across the nation. This is of course a very healthy (literally and figuratively) development and exactly what is needed to go through the correction phase of the business cycle. The one large stumbling block in the way of this correction is as always the US government whose officials don’t understand the necessity of a corrective phase in the business cycle at all. Their measures ensure that this correction will take painstakingly long.

Related posts:

1. November retail sales drop, investors dream of bottom
2. Double Dipping – US Back in Recession
3. True Consumption as Percentage of GDP