There was an article in Wednesday’s Wall Street Journal that made me sigh. Or did it make me wince? I can’t remember. The title was “Reluctant Shoppers Hold Back Recovery.” I knew from the title that the entire premise of the article was wrong.
Before I get into my thoughts on this, here is the gist of the article, wherein they note that retailer earnings have been bad:
“Major retailers reported that American consumers are continuing to hunker down, casting a cloud over the durability of the U.S. recovery and underscoring the importance of overseas demand in restoring the world economy to health. ...
“American consumers appear so shaken by the worst recession since the Great Depression — and so pinched by unemployment, stagnant wages and stingier lenders — that they are reining in spending on all but basics. Economists also see an upturn in U.S. household saving as the beginning of a prolonged period of thrift.
“The retailers’ reports serve as a reminder that it will be consumers, foremost, who will fuel a sustained U.S. recovery. Consumer spending accounts for about 70 percent of all demand in the U.S. economy. ...
“In a survey of economists this month, the Wall Street Journal asked if a substantial increase in consumer spending was needed for sustained growth. Of the 43 economists who responded, 60 percent said yes. ...
“Earlier this week, the Federal Reserve said a July survey of banks found continued tightening of lending standards as well as a diminished appetite for borrowing among consumers. About a third of banks said they tightened lending standards on credit cards and other consumer loans since April. No banks reported relaxing them.
“U.S. households are also reckoning with a large drop in wealth during the past two years. Between the second quarter of 2007 and the first quarter of 2009, the most recent for which Fed data are available, household net worth contracted by 22 percent amid drops in home prices and the stock market.
“That gives Americans a greater incentive to save to make up for their paper losses.”
How can everyone be fooled into believing this Keynesian premise, that all you have to do is have people spend money to make the economy recover? If spending money were the key to recovery, what about Zimbabwe, where they spent like mad?
This gets into the Keynesian concept of “hoarding” where, they say, the cure to our economic malaise lies in the hands of those stupid consumers who won’t let go of their dollars. Don’t they know that they are ruining everything? They need to spread those dollars around the economy and loosen things up.
But wasn’t massive spending part of the problem? People borrowing cheap Fed dollars to spend on houses, cars, boats, dinners out and lingerie.
No one seems to ask where the money is coming from for people to spend. Since the average consumers have lost 22 percent of their wealth, and since they have record amounts of debt to pay off, with one out of every eight mortgages falling behind, with increasing unemployment, continued deflation and tightening credit, why would or should they spend?
Right now, nothing is going to fuel growth until the economy stops deflating. Most businesses are reluctant to take on new debt to grow while things are unsettled. Most banks are unwilling to lend because of the increased risk in the markets. The result is deflation, which, if you think about it, is just the revaluation of assets to their current economic value to someone. Or another way to think about it is: It is the true value of things that no one wants. This is a healthy process and absolutely necessary in order for the economy to repair itself. It frees up capital from bad investments and steers it to more economical ventures.
Real economic growth is fueled only by savings. Saving is the necessary first step to set the stage for future economic growth. And here I am talking about real savings, not inflated dollars. Real savings are those dollars that people earn and choose not to use for consumption. This is real wealth. They are deferring spending until they feel their economic circumstances have improved. And the key here is “deferring consumption,” or, a conscious choice to not consume. Get it? They aren’t ready to buy stuff.
There is only one thing the government can do to help this situation, and that is: nothing. All of the stimulus from the government only serves to interfere with the savings process. You can’t have real growth by taking money out of one end of the economy and give it to someone else on the other end to spend. The net dollars are still the same. No one has ever shown that the Keynesian multiplier has any lasting effect or causes real economic growth.
Also, you can’t have real growth by inflating the money supply and causing inflation. Those are just more pieces of paper, not more wealth.
You can only grow by saving real wealth.
Please ignore these journalists and economists begging us the spend. They are still flogging that dead Keynesian horse; it has never gotten up and never will.
— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.