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291 comments on DrumBeat: August 3, 2007

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Stoneleigh on August 3, 2007 - 10:18am Permalink | Subthread | Parent | Comments top

Thanks for spreading the word John - much appreciated.

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ace on August 3, 2007 - 9:23pm Permalink | Subthread | Parent | Comments top

Thanks, Stoneleigh

Your chart on Household Cash Less Liabilities made me think more about the household.

The chart below shows the precarious state of the US consumer from Paul Kasriel, Northern Trust,
http://web-xp2a-pws.ntrs.com/popups/popup.html?http://web-xp2a-pws.ntrs....

Households: Net Financial Investment and Sum of Liabilities Increase and Corp. Equity Sales as percent of disposable personal income

Kasriel says, in reference to chart above

"I have combined households’ net increases in liabilities and their net sales of corporate equities, scaling this sum against disposable personal income. As households began running deficits in 1999, their borrowing and sales of assets – corporate equities – increased in order to fund their deficits. In 2006, households’ combined borrowing and corporate equities sales reached a record high 17.0% of disposable personal income."

He says on his last page

"To repeat, if households are spending more than they are earning, they must fund their deficit either through borrowing and/or asset sales, neither of which is a wealth effect. To deny that MEW (mortgage equity withdrawal) has played a role in funding household spending when households have been running deficits flies in the face of logic and data. Chairman Bernanke is whistling past the graveyard if he thinks that the housing recession is not going to negatively affect consumer spending via declining MEW."

This chart above shows US real GDP in the blue line, (corrected for CPI+lies) from http://www.nowandfutures.com/forecast.html

The recent drop in the US GDP (blue line) shows strong coincidence with Kasriel's increased liabilities/equity sales and decreased net financial investment in the first chart.

In the US, consumer spending accounts for about 70% of the GDP.
http://wiadomosci.onet.pl/1579466,10,1,1,,item.html

If this true measure of GDP (blue line) has been negative (ie recession) since 2006 and households have been running deficits for seven years, since 1999, does this mean that the US consumer spending will show, at best, no growth for the next seven years?

As consumer spending is (was?) about 70% of the US GDP, does this mean that the US could be in a recession for another seven years?

One effect of an extended recession would be that US demand for oil should drop.

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HeIsSoFly on August 3, 2007 - 11:11pm Permalink | Subthread | Parent | Comments top

Ace,

Can I first suggest that you post replies such as this either at Stoneleigh's site, or maybe preferably at both? There are more reactions to her work here than at TOD:Canada, and that is simply strange, no matter how you look at it.

I see a lot of appreciative comments for the Round-Up here, in the Drumbeat, but I think it's real obvious that that kind of effort deserves reactions right where it's posted. There is of course a sitemeter that provides info on traffic, but if that remains anonymous, it's not really a booster, I would guess.

Just thought I'd point that out again, for everyone who reads all those articles over there. There is a critical mass somehow that is required to start a true conversation, and Stoneleigh deserves for that to happen, and more. I think.

As for your post: I didn't know you are following financial news, just seen your excellent oil posts so far.

Your question:

does this mean that the US consumer spending will show, at best, no growth for the next seven years?

.... doesn't go far enough yet, I think. All reported growth in the US economy since 1998 is most probably virtual. The first graph you post confirms exactly that. It shows an ever deeper level of debt. And whether it's federal, or personal, or something else, the US has accumulated a huge amount of debt since '98. Hence, any GDP number is bogus. None of us get richer by borrowing.

US GDP growth has been negative for years, and inflation has been way higher than official numbers. Housing prices have more than doubled, while the roofs have started leaking, and the paint is peeling. Getting paid just to live in a home. Yeah, feels good, right?

It's what Joe Bageant aptly calls: living in the hologram.

There has been no growth in the US economy for a long time. But it's like you when you lose your income, and have a neighbor you can go to every day for another$100. You can spend every night. but does anything grow, except for your debt? So does your neighbor give you the $100 every day beacuse he's stupid, or did you sign a paper that says he owns more and more of your property?

Stoneleigh thinks there is an unequaled economic disaster coming our way, of the kind that will make 1929 look like a 5-year-old girl's birthday party in full sunshine, and I think she's right. Housing prices have doubled in the US in 10 years, but that's nothing: Forget subprime.

The amount of leveraged credit, hedge funds, CDO's, has gone up 10-fold. And none of it is real. We are fast on our way to find out what IS real. Misery is. Debt is.

PS: the graphs Stoneleigh uses come from the ContraryInvestor, unfortunately a pay site, with some things posted elsewhere. Their strength is twofold: first, they are graphically better than just about anything I've seen, and second, they are unique in that they go back 50-60 years, which makes for great and very convincing trendlines. Just look at the first one, Household Mortgage Debt since 1947, and then tell me you think this time it's all different.

Meanwhile, nothing but appreciation for you from me. BTB, I had to look twice at your second graph, but it's true: it states "GDP, adjusted for CPI+lies". Priceless.

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Stoneleigh on August 3, 2007 - 11:13pm Permalink | Subthread | Parent | Comments top

Thanks Ace - really interesting.

Personally I would be very surprised if consumer spending showed any growth for a very long time because I think we're in for a rerun of the Great Depression (at the very least). We've just lived through the largest credit expansion in history and should now IMO see the largest credit deflation (ie Enron on a very large scale).

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wstephens on August 5, 2007 - 8:40am Permalink | Subthread | Parent | Comments top

I'm not saying that a recession isn't coming or that the housing market won't do some economic damage -- but GDP is partly a measure of what you cannot do for yourself. GDP is also partly a measure of waste and high profit margins. The internet and cell phones have probably saved me several percent of income per year of wasted money (and time). This effect multiplied over millions of consumers may mean that GDP could be "flat" while "consumption" rises.

People are providing more service for themselves, finding the correct products more often, and finding lower margins products due to the internet and cell phones. Economic efficiency could increase and neither GDP nor productivity measures would capture it.

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