truth about the recession (don't blame umbrellas for floods)

[lester1/2jr]

don't "get out there and spend" and think you are being patriotic.  save for yuor ownfuture like you are supposed to.  true capitalism doesn't need a coerced consumer


Are Consumers Driving Us into Recession?
by Llewellyn H. Rockwell, Jr.


With recession looming or already here, the time has arrived for finding scapegoats. Expect a long list of these. Here is the target of the day: tightfisted consumers. A decline in personal consumption, writes the New York Times, "would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year."

This recalls Bush's advice after 9-11, when he assumed the mantle of the nation's personal financial planner. He told everyone to go out and spend money so the economy could avoid recession. Even then, there was confusion about whether he was right or wrong. Some sensible voices pointed out that economic expansion is based not on spending but on capital expansion rooted in savings. That is to say, the only path to future prosperity is delaying current consumption in favor of future investment.

One only needs to think of the household budget here to see the point. If you are planning for the future for your family, what is the wisest course? Does one go into debt as much as possible, buy the largest house and the biggest car, throw lavish parties, hand out all existing liquid funds to friends and strangers? Based on the view that consumption is the way to avoid economic problems, this would indeed be the right course.

But this also defies everything we know about family finance. The path to a secure prosperity is delaying consumption. One should spend as little as possible and save as much as possible for the future, and let that money be used in the service of investments that yield a solid rate of return. Those who have chosen a different path now see the folly: they are being burned in the soft housing market, for example.

The lesson is also true for the nation at large, because the logic doesn't magically change when moving from the family budget to the national stage. Just because something involves "macroeconomics" doesn't mean that we should throw out all good sense. But that is precisely what people have done with regard to the economy, since J.M. Keynes somehow convinced the world that up is down and left is right.

In a recession or a crisis, the right approach for individuals is to save. So too for the national economy. A looming recession will prompt a pullback in consumer spending as a rational response to the perception of economic troubles. This action does not cause the economy to fall into recession any more than more spending can save it from recession. The downturn is a fact that cannot be avoided. We don't blame umbrellas for floods, and, in the same way, we shouldn't blame tightfisted consumers for recessions.

There is no question that this is what is happening. American Express reports that the rate of spending by its cardholders fell 4% in December. Surveys of consumer satisfaction with the economy report a 15-year low. Retailers report that December was a "blood bath" (NYT's words) for them, with sales growing at the slowest rate in seven years. Market watchers are mostly concerned that high-income buyers are bailing out.

Again, it is critical to keep cause and effect in mind. The pullback on spending is not going to cause a recession. If we think about the long term, this is not a dangerous trend but a hopeful one. The more people pull back and save, the more the foundation is laid for a recovery after the current correction takes its course.

To see that requires that we take a long view. Government, however, seems constitutionally incapable of seeing the long term, much less doing the right thing to prepare for it. Making matters worse, this is that dreaded event called an election year. Prettying things up to make the economy palatable to voters is priority number one.

What does this mean? More monetary expansion. More government spending. We can fully expect that the Bush administration could resort to its old program of sending checks out to every American family with the proviso that the money has to be spent, not saved.

No doubt that many people would be thrilled by this. But look beneath the surface. Government has no money to spend on anything that it doesn't extract from the pockets of you and me and the whole American public. This is easy enough to see concerning taxes. It is not so easy to see when the government runs up debt that is guaranteed by the printing presses.

The monetary issue can be understood by analogy to orange juice. The more water you add, the less substance it has. If you keep adding, eventually you come to the point when you can no longer tell that it was ever orange. This is the same with money. If you print enough – literally or electronically through the credit markets – it will continue to lose value. If money grew on trees, it would be about as valuable as autumn leaves.

So long as we have a central bank, government will be tempted to take the easy path of easy money. There do not need to be any secret phone calls from the White House to the Fed. The culture of policymaking itself is capable of broadcasting the right signals to all important players.

In any case, it is a myth that the Fed makes policy independent of political pressure. It is subject to the screams and hollers for looser credit in the same way that bureaucracies are responsive to demands for more regulation. It is what it is most suited to do in any case.

Yes, government can increase consumption, but by doing so it does nothing to care for the long term. The long-term health of a nation is not different from that of a household budget. Tough times require cutbacks and a beefing up of savings.

So let's not demonize the consuming public for doing what it should be doing. It's a good rule of thumb that when the government tells you to spend money, close your wallet.

[Killer Bees]

I'd just like to say this about the recession/sub-prime market woes.

I'm not much of a consumer.  And I have modest savings.  I've never had trouble getting a job, no matter what the economy.  I believe saving money for a rainy day is an excellent idea and if more people lived within their means, there wouldn't be a need for a sub-prime housing market. 

It's just madness to give credit to those people who can't afford it.  Did the financial institutions really not see this coming?  If you can't afford a mortgage, charging people higher interest rates to make up for it won't make a lick of difference and just gets everyone into trouble.

I understand the  need for people to have their own homes.  But, for corn's sake, people, at least buy when you can afford it.  And if you can't, there's nothing wrong with renting.  The trouble is, when the US goes into recession, it affects the whole world.  Fortunately for us, our economy is quite strong so we shouldn't be affected too badly.  But it means everything will get more expensive.  And that extra money you pay for food or rent has to be found somewere.  I just feel sorry for those families who have to choose between paying the power bill and eating for the next week.

In this culture of gross materialism and instant gratification, it's no wonder so many people are in debt and struggling.  But responsibility for your situation starts with YOU.  The government isn't responsible for your smoking/gambling/crack/alcohol habit.  Nor is it responsible if you don't put aside a little money every week for your power bill when you choose to go out and buy a $500 handbag like Paris has.

A little more fiscal conservatism by the Mr and Mrs Average Joe would go a long way to making things better.  And the economy wouldn't suffer, because people will always buy stuff.  Hell, even I love my DVDs, books, CDs, cosmetics, hobbies.  But I don't pay for them at the expense of putting a roof over my head or food on the table for me and my son.

Here endeth the rant.

[CheezeFlixz]

Lester sometimes you say things that almost make sense.
Sometimes you sound like Tom Cruise ... this is one of those times.

Let me make it simple ...

Recession, economy recedes.
Capitalism is driven by consumerism.
Consumer don't buy, retailers don't sale.
Retailers don't sale, wholesale order aren't placed.
Wholesale order aren't placed, manufacturers don't produce.
Manufacturers don't produce, employees at all levels are laid off.
Employees are laid off, unemployment jumps, spending stops and recession begins.
And you end up in economic gridlock.

This is why pumping money into the economy through consumerism wards off recession. It's a whole lot easier to keep the economy moving than trying to jump start it once it stops. I've made it much more simple then it actually is, but that's it in a nutshell.

Should people save some money, yes. Should they bury it in a jar in the backyard, no.

Llewellyn H. Rockwell, Jr. is a noted Libertarian and Ron Paul crony so a large grain of salt is required.

[ulthar]

I'd just like to say this about the recession/sub-prime market woes.

I'm not much of a consumer.  And I have modest savings.  I've never had trouble getting a job, no matter what the economy.  I believe saving money for a rainy day is an excellent idea and if more people lived within their means, there wouldn't be a need for a sub-prime housing market. 

It's just madness to give credit to those people who can't afford it.  Did the financial institutions really not see this coming?  If you can't afford a mortgage, charging people higher interest rates to make up for it won't make a lick of difference and just gets everyone into trouble.

I understand the  need for people to have their own homes.  But, for corn's sake, people, at least buy when you can afford it.  And if you can't, there's nothing wrong with renting.  The trouble is, when the US goes into recession, it affects the whole world.  Fortunately for us, our economy is quite strong so we shouldn't be affected too badly.  But it means everything will get more expensive.  And that extra money you pay for food or rent has to be found somewere.  I just feel sorry for those families who have to choose between paying the power bill and eating for the next week.

In this culture of gross materialism and instant gratification, it's no wonder so many people are in debt and struggling.  But responsibility for your situation starts with YOU.  The government isn't responsible for your smoking/gambling/crack/alcohol habit.  Nor is it responsible if you don't put aside a little money every week for your power bill when you choose to go out and buy a $500 handbag like Paris has.

A little more fiscal conservatism by the Mr and Mrs Average Joe would go a long way to making things better.  And the economy wouldn't suffer, because people will always buy stuff.  Hell, even I love my DVDs, books, CDs, cosmetics, hobbies.  But I don't pay for them at the expense of putting a roof over my head or food on the table for me and my son.

Here endeth the rant.

Very well said. Karma for you.

[nshumate]

Cheeze, your response would make sense... IF Lester were advocating anything remotely like burying money in a jar in the backyard, which he (or the column quoted) was not.  Nobody's advocating pulling money OUT of the economy; the idea presented was very clearly "save and INVEST, rather than spend now."  Investment is also a big part of the economy, and it's certainly more responsible in both macro- and personal economics than simply acting as a conduit between one's income source and retail outlets.

[CheezeFlixz]

Cheeze, your response would make sense... IF Lester were advocating anything remotely like burying money in a jar in the backyard, which he (or the column quoted) was not.  Nobody's advocating pulling money OUT of the economy; the idea presented was very clearly "save and INVEST, rather than spend now."  Investment is also a big part of the economy, and it's certainly more responsible in both macro- and personal economics than simply acting as a conduit between one's income source and retail outlets.

It says ...

The path to a secure prosperity is delaying consumption. One should spend as little as possible and save as much as possible for the future, and let that money be used in the service of investments that yield a solid rate of return.

Currently in this volatile time, I'm not sure anything will yield a solid rate of return as the column states. Short of long term capital investment, but this goes against the grain of this guy, and he doesn't answer what is a investment with a solid rate of return? He leaves if open to vagueness, he says delay consumption as long as possible, well capital investment is a form of consumption so what's left? Burying it in jar in the backyard?

So anyway, I said that was in a nutshell and not an all inclusive lesson in Capitalism 101.

[lester1/2jr]

cheeze-  first speaking of scientology did yuo know the fair tax was ifirst put forth by scientolgists?  they oppose government intervention into health care (mainly pyschiatry).  just fyi


anyway,  like the policies that created it, the solution being bandied about for remedying the recession are short term and meant to influence the upcoming election.  How about cutting out the department of education?  or FEMA?  I'm positive we can get along without those two organizations and that's a couple billion worth of beaurocracy there.   

We have a 3 TRILLION dollar budget.  There's NOTHING we can cut?  for the sake of our country?


I saw Sam Browwnback and Chuck Schumer a month ago on CNBC begging ben bernanke to cut interst rates.  brownback  for the business owners and Schumer for the consumers (in general).  there's your democrat and republican representation.  devalue our currency, literally steal from us,  so that these guys can get past their next electoral hurdle. 


the people have done their part, it's time for the government to live within THEIR means

[CheezeFlixz]

the people have done their part, it's time for the government to live within THEIR means

See you can say things that make sense ... I agree with you on that and I could go on a long diatribe about what government can cut spending on, and I'd start with entitlements, which is a single largest outlay of cash every month, thank you FDR.

Bush is said to be going to announce tax rebate here in a bit up to $1600 per family and that will not work either, tax cuts work, tax rebates don't.

Here is a good primer on why ...
http://www.heritage.org/Press/Commentary/ed011008c.cfm

[lester1/2jr]

have you read bruce bartlett's "Imposter"?  I'm not the biggest fan of his but it's very good and makes the same point.  rebates are a gimmick, they are almost welfare really. 


defense spending is wholly out of control as well, it has to be said.  not just the war, though I would argue that owuld be the FIRST place to cut.  It's like 657 billion out of the 3 trillion or something.  so they can make lasers that shoot around corners.  how about don't get us bogged down in close quarter urban combat for 5 years?  then we can get more of the best techology there is : soldiers.

[AndyC]

The original article is a bit simplistic for me. Economic growth depends on keeping money circulating, which depends on keeping it in the hands of those who will spend it.

Keep it in a bank, and they'll loan it to people who will spend it. Invest it in a company, and they will spend it to make more money, which they make from people spending money. The more hands it passes through, the better.

Whether you personally consume, save or invest, the economy is driven by one thing - spending.

And personal spending can give you some control over who benefits from your money. The local Mom and Pop stores aren't likely to benefit as much from your mutual funds as the big corporations, but if you buy from them, they are more likely to spend their profits in your community.

From a personal point of view, you need to have some savings to retire on, and some money in the bank for emergencies, but from a larger economic point of view, there is only spending. Money in circulation, that's what it comes down to.

[lester1/2jr]

Andy-  his point is this current problem was not BROUGHT on by tight fisted consumers and cannot fairly be said to be EXCACERBATING it as much as the governments own policies.   You don't have to tell americans to spend for god's sake.    People didn't make this one of the slowest christmas's ever retail wise because they felt like it.  they did it because of gas prices and other economic factors.  deal with those factors not the victims of all this, the american people

[AndyC]

No, he's pretty clearly saying that saving your money is the way to long-term prosperity. Personal prosperity perhaps, but the bigger picture depends on keeping money circulating, and especially putting it in the hands of the right people, to spread the benefit to the retailers, wholesalers, manufacturers, and all of their investors and employees.

Slow retail sales are something of a chicken-and-egg issue. Are they part of the cause or just an effect. I'd say a bit of both. They're part of a cycle, just as Cheeze described. I've always been of the belief that recessions are self-fulfilling prophecies. Think of how the bottom can fall out of the stock market for no reason other than the fear that the bottom might drop out of the stock market. And they've actually put safeguards in place to prevent that since 1929.

I'm not suggesting you can have perpetual prosperity if everybody spent more money than they normally would. That's not sustainable. However, when people start tossing around speculation about coming recession, that does make some part of the population hold off on purchases they might otherwise have made, particularly the large ones. Maybe the economy has slowed, but suddenly, it's just slowed more, and that will cause it to slow more, and so on.

You can't argue that it's because the average consumer has no more money to spend. Regardless of where it goes, if something is costing money, then somebody is making money. The only answer is that the money has either left the economy and entered someone else's, or it's just not moving around as much as it was. There is always the possibility that years of buying has caused a drop in demand, and a surplus of goods. However, a drop in demand would be met by a drop in price, and the result would be more buying.

Think of this. The dollar you spend is spent again and again and again. Now, if you decided to hang onto even a little bit more of it than you normally would, the effect is multiplied.

I'm not suggesting that recessions don't have other causes, but they are made worse by people reacting to the situation by changing their normal spending habits. Increased spending can ease a recession. The answer here is not that p**sing your money away is a good thing, it isn't. But maintaining your normal spending habits is helpful, while being unusually tight with your money in the face of a looming recession will only make matters worse. Remember, I'm talking about consumers as a whole, not individuals.

After 9-11, Bush had a very good reason for telling people that spending money was the patriotic thing to do. They were scared to death, and there was a very real possibility that the economy of the United States, and the rest of the world, could have gone into the toilet if people suddenly stopped their usual buying out of fear about the future. Self-fulfilling prophecy. The point was not to make people buy more, but to make sure they kept buying.

[ulthar]

defense spending is wholly out of control as well, it has to be said.

It also has to be said that "common defense" is one of the few Constitutionally mandated responsibilties of the federal government; there are not many.

We can debate "how much," but I sure hope you are not saying we should not have a military just because war itself is evil.  As others have pointed out before me, it sometimes is a necessary evil.

You may think the current war is not justified; that's a separate debate, which I don't want to have here.  But I am wondering, just out of curiosity, is it your stance that we should NOT have a military?  If you DO think we should have a military, what is your idea of a "good" amount of money to spend on running/operating it?

[lester1/2jr]

lol no I don't think we should eliminate the military.  As you rightly point out the constitution calls for one.    but our military budget is infamiously large, larger than all the military budgets in the world combined or something.


We have too many committments.  that is all I'm saying.


[quote="andyC]Personal prosperity perhaps, but the bigger picture depends on keeping money circulating, and especially putting it in the hands of the right people, to spread the benefit to the retailers, wholesalers, manufacturers, and all of their investors and employees.[/quote]

I say there is no difference between personal prosperity and national prosperity. 

[AndyC]

The two are closely linked, with national prosperity simply reflecting the proportion of prosperous people, and how prosperous they are, on average. The difference is that it is an average.

One guy can live like a miser and save every cent above minimal food and rent. He'll build up a sizeable nest egg. But if a whole population did that, it would be disastrous.

When you save money, the people down the line pay for it. If you decide to economize by giving up your morning coffee and donut, that means lost income for the coffee shop, as well as for their suppliers, and eventually for their employees. For one person, it's a tiny amount, but if more people do the same, things get worse. And the ripples keep spreading. And your own savings are not entirely a guarantee of prosperity, as the chain reaction can come all the way back around to you.

If you want a good example of how one person's savings can hurt others, consider how the low prices at, say, Wal-Mart are achieved on the backs of underpaid staff and cheap overseas manufacturing that, in turn, costs jobs at home. People pay less, but somebody else pays the balance.

But back to individual vs. national. Numbers make a huge difference. You can look at individuals, and the results are all over the place. When talking about an economy, you have to look at large groups.