Is the American consumer, a vital driving force behind economic growth, becoming indifferent? Recent data suggests this may indeed be the case.
According to the early July index reading from the Thomas Reuters/University of Michigan, consumer sentiment stands at 81.3. This figure falls short of the anticipated 83 and is slightly below June’s reading of 82.5. Although consumer sentiment may be down, its relative stability raises questions about the underlying factors at play.
Survey director Richard Curtin remarked, “The most remarkable aspect of recent trends in consumer confidence has been its resistance to change in either direction despite significantly negative GDP growth and positive employment gains. This stability will provide the necessary strength for consumer spending to continue expanding, but it does not support an acceleration in spending above 2.5 percent.”
It’s crucial to remember that consumer spending constitutes 70 percent of the economy. At face value, increased consumer spending indicates economic growth. However, this doesn’t capture the entire picture.
Much of consumer spending is fueled by an abundance of low-interest credit, leading to the paradox where rising consumer expenditures may actually reflect a growing number of individuals struggling financially. This basic principle seems to be overlooked in contemporary monetary policy.
An Unstable Sediment of Debt
When consumer sentiment declines, the Federal Reserve reacts with alarm. The prevailing belief is that reduced consumer spending will decrease demand, which in turn will lower production and prices, potentially leading to a deflationary depression.
This reasoning may appear sound, but the Fed’s efforts to stave off deflation are both misguided and hazardous. While they attempt to delay economic downturns, they inadvertently set the stage for a significantly larger and more disruptive economic collapse in the future.
Fed policymakers, adhering to Keynesian principles, maintain that the solution lies in providing abundant cheap money. They assume that lowering the cost of money will fuel spending, create demand, and ultimately solve all economic woes. The vision is one of economic prosperity leading to widespread wealth.
Yet, despite multiple rounds of quantitative easing and other stimulus measures resulting in a sluggish economic recovery, the Fed persists in its course. Their continuing reliance on cheap credit threatens to undermine the very fabric of the economy.
The “demand” cultivated by the Fed is not authentic but rather a façade built upon a precarious mound of debt. And this is just the beginning of the issues at hand.
Slip Back Economics
Entire sectors have emerged to sustain this artificial demand. For instance, today’s colleges and universities would be vastly different without the influx of student loan debt. Similarly, auto sales would plummet if not for lenient lending practices.
In fact, a looming crisis in the subprime auto loan sector has come to light. Just recently, it was reported that one individual, Rodney Durham, who has not worked in nearly 25 years, filed for bankruptcy and lives on Social Security, was somehow able to secure a $15,197 loan from Wells Fargo for a Mitsubishi that was repossessed shortly thereafter.
The takeaway is clear: policies aimed at stimulating demand through easy credit often lead to catastrophic results. Both the rising student debt crisis and the impending turmoil in auto loans will have profound implications for the economy and individuals alike. And these are just the obvious distortions; many others may sweep through the economy like a series of tidal waves.
These same policies have rendered it nearly impossible for a median-income household to sustain a middle-class lifestyle, further entrenching the nation in a cycle of debt. The upsetting trade-off? A temporary uptick in GDP figures and a dip in the unemployment rate.
Regrettably, these manufactured indicators of economic improvement do not reflect a genuinely robust economy. Instead, they exhibit a system operating on overdrive and sliding backward. For countless individuals, enduring such an economy becomes increasingly intolerable each day.
Sincerely,
MN Gordon
for Economic Prism
