Spending, Savings, Income, Debt, & Jobs…It’s All Related

For over two decades we have made the case that people, in their own small, individual worlds, make decisions that cause huge effects in macroeconomics.  Currently economists, policymakers, market pundits, money managers, and just about anyone who can grab a microphone are all clamoring to arrive at the reason for our continued malaise, or as PIMCO has labeled, it, the new normal.  On Saturday in the NYT the Nobel Laureate Phelps claims there is no sign of deflation or a drop in aggregate demand, just a lack of ingenuity, investment, and inclusion of low wage workers in the profits of companies.  I guess the fact that the largest asset owned by Americans -their homes – has dropped from 20-40% somehow didn’t make the list of deflationary items.  Or the falling income of workers over the past two years, or even the move of consumers to save more AND pay off debt.  I’m not sure what counts as deflationary in his book, but a systematic de-leveraging of the economy while prices of assets fall and incomes decline sure makes it look like deflation to me.I’m not singling out Mr. Phelps because I believe him to be wrong, I bring him up because he is a well respected figure in the field of economics but is apparently just as clueless as, well, most everyone else, as to how we got here and what lies ahead.  There are endless accounts of what is causing the new normal to persist – uncertainty about taxes, uncertainty about jobs, not enough stimulus, too much safety net for those out of work, not enough safety net, etc.  Is it confidence? Lack of visibility on govt actions? Uncertainty as to the consumer’s or business owner’s situation?  The answer is a combination of all of these, but it starts BEFORE we ever get to these notions.  Let me explain.Before I can worry about the US government taking more of my money in taxes and reacting to it, I have to be in a position of determining my spending versus simply living paycheck to paycheck.  The same is true of any “uncertainty.”  Before it can be a major factor in curbing my spending or causing me to spend more, the ability to change my spending according to my notions and whims must exist.  This is EXACTLY what we have desperately been trying to get people to understand for, oh, ever.Our nation is now at a point where the largest generation (boomers) are in control of a large part of their income.  They can decide.  Should I buy this thing, or wait?  Should I invest or consume?  How am I better served?  No longer are they competing to consume the most, fueled by their family situation and social circles.  The game has changed.  This group is acting exactly as they are supposed to.  They are looking at the future with trepidation.  Do I have enough money to retire?  Can I afford ABC?  Maybe I should save more.  This is what we want people to do, right?The problem is, when a few people do it, things are good.  When a huge number of people do it, the economy slows.  We can make up lots of cool reasons as to why, but the simplest reason is the best – people are spending less because it fits their stage of life.  This has been compounded by many things, mostly the deflation of bubbles (debt, asset prices, etc) that grew out of feeding the last stage of life these people occupied – that of the largest consumer.So here we are living through the most predictable of economic seasons with all of the markers of a long slog in front of us.  Everyone seems bent on either trying to change it (goose the economy) or blame someone else for not changing it.  There is another way – manage down to a lower level.  This is the path we have always pointed to, as it is the only sustainable path, the only one that makes sense.  Stimulus doesn’t work.  Giving taxpayers more money, hoping they will spend it, doesn’t work.  The path out of our current situation is unfortunately neither quick nor painless.  We will continue with slack demand, we will continue with deleveraging, and it will take time.What we can do is decide how to spend this time.  Do we make it easier for those who took on too much debt to cast it off?  Do we put people to work on projects we want anyway (digitizing health records, for example)?  Do we raise taxes at higher levels of income?  This is not a list of suggestions, but a list of questions.  We will be much better off when we finally accept our situation and begin discussing how best to use this time of contraction instead of chasing pipe dreams of “expansion just around the corner.”

Read the original story at H. S. Dent