There have been musings around blogoland with regard to the consumer’s health and willingness to spend, or not. Mish and others have promulgated the idea of a new reality for the consumer, viz. he will be saving, repairing his Balance Sheet.
This seems to be presented as a negative. In response to the new frugality of the consumer, the Treasury and Federal Reserve have stepped into the void left by the former consumer.
The consumer, in past recessions, provided this data. It seems to have caused concern. The gist being that if the consumer stops spending, that the profitability of corporations will collapse. True, some may enter bankruptcy. The bankruptcy process releases capital from less efficient producers and reallocates capital to more efficient producers.
The more efficient producers win this market share by producing better quality at a lower price. This fall in prices, creates a rise in purchasing power, or real wages.
Note the highlighted data. In the 1980 data, inflation was still a huge factor. It was only with Paul Volcker raising interest rates to choke inflation that the real purchasing power of the consumer came good in the culmination of the 1982 recession.
Year…………………………..Inflation Rate
1980…………………………….. 13.52%
1981…………………………….. 10.38%
1982……………………………… 6.13%
Recession …………………………….Increase In PCE During Recession
4/60-2/61 ……………………………………………..0.1%
12/69-11/70 …………………………………………..0.8%
11/73-5/75 …………………………………………….2.2%
1/80-7/80 ……………………………………(1.1%)
7/81-11/82 …………………………………….4.0%
7/90-3/91 …………………………………………….(0.3%)
3/01-11/01 ……………………………………………1.9%
12/07-7/09 …………………………………………..(1.8%)
Also mooted around blogoland is the Japanese experience. The Japanese experience is different from the current US experience in significant details. The Japanese zombies were banks and Corporations, the US zombies are consumers and formerly the banks. The banks have/are being bailed out on a huge scale.
Assuming that both form of zombies act in the same way, they save as much as they can to pay down debt via earnings. The results and consequences are very different.
Corporations invest to expand production, to bring down variable costs, to win market share, to expand profits. Consumers when they save, reduce consumption to provide the funds for corporations to invest. Thus, consumer saving contributes to falling prices and increases in real income.
The government, through truly cretinous leadership and advice are determined to short-circuit this healing process by trying to maintain consumer spending via Welfare, shovel-ready, etc. The result is an inflation, which results in a fall in real incomes.
Here we have nominal wages & salary data:
And the exchange value of the US dollar:
As can be seen, in real terms, wages & salaries were rising not due to increasing wealth and productivity, but simply due to an inflation.
In summary, increased savings by consumers, and falling consumption should not be feared, rather it should be encouraged. It is increased real savings that expands the productive structure, thus producing more for less, which increases wealth.
