Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 14
a little story.

i cut an extention cord with the snow blower yesterday.
use it to a block heater on my truck.
waz under the snow and i forgot it being there.

i just got back from buying a new one and it waz only
8 bucks and change for a 100 ft grounded 10 amp cord.
shoot.. i can remember paying 3x that much for one.
made in malasia.. imagine that.. whuch reminded me
of this article.. so i post it.

By Marc Faber

While analysts, pundits and government quants all cheer the American consumer, rising retail sales that are not accompanied by a rise in industrial production are highly questionable as an indicator for the domestic economy. In fact, they are a far better indicator for the strength of the Chinese economy.

Consider the following. The U.S. housing industry is booming. However, U.S. production of appliances is flat to moderately down compared to a year ago. Or take the home furnishings industry, which should be a prime beneficiary of strong home-building activity. However, furniture imports into the U.S. have jumped 71% since 1999 in three years and now comprise between 40% and 50% of all sales as of the second quarter of this year.

For wood and metal furniture, principally bedroom furniture, chairs, tables, and cabinets, import penetration has increased even faster. The imports of such items now account for 80% of sales by domestic manufacturers, compared to 20% a decade ago. According to an economist who has studied how U.S. industries have been affected by rising imports, half a million workers lost their jobs in the furniture industry between 1979 and 1999. This is in stark contrast to China, which has become one of the world's largest manufacturers and exporters of furniture, claiming 10% of the global market share.

In the first seven months of this year, furniture exports - principally to the U.S. - rose 35% to more than US$3 billion.

Perhaps Fed governor Ben S. Bernanke should consider this point when advocating an ultra-easy monetary policy. In his now famous "printing press" speech at the National Economists' Club in Washington, Bernanke suggested that: "By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services. We conclude that, under a paper- money system, a determined government can always generate higher spending and hence positive inflation."

What Mr. Bernanke said in his speech was already evident to market observers, since M3 has gone up almost vertically since October 7, rising at an annual rate of 22.5%. (Please also note that, for Mr. Bernanke, the Fed, which is supposed to be an independent institution, and the government are one and the same.)

I would concede that the government can generate temporarily higher "spending" - but overseas!

If we look at the increase in U.S. retail sales over the last three years and compare it to the increase in the U.S. trade deficit, we note that practically all additional retail sales originated from the import of additional overseas products.

Mr. Bernanke's U.S. printing press seems to have an extremely limited effect in stimulating domestic economic activity, while being very effective in stimulating foreign direct investments and industrial production in China and, increasingly, Vietnam.

A similar situation to the U.S. furniture industry is evident in its auto industry. While overall auto sales are robust, sales of the three domestic producers are currently lower than they were in the 1990 recession, while sales of imported cars and light trucks are at a record. Ford announced recently that it will boost its purchases of auto parts in China to as much as US$1 billion annually starting in mid-2003.

The shifting U.S. economy is reflected in the jobs picture, too. The "goods-producing" sector lost 332,000 jobs in the last eight months, while at the same time the service- producing sector has added 506,000 jobs. Mortgage brokers, most notably, were up 47, services employment was up 178,000, education up 92,000, and government up 158,000. In the meantime, the number of manufacturing jobs is back to the 1961 level.

Rising import penetration aside, there is another reason to be skeptical about the durability of strong U.S. consumption growth. For one thing, it should be obvious that there is at present no pent-up demand in the U.S., as consumers have not yet retrenched and rebuilt their liquidity, as was the case in previous recessions. In addition, until recently, U.S. consumption was boosted above the trend-line by a decline in the savings rate. In the absence of strong stock market gains in the near future, it is likely that the savings rate will increase somewhat in the next 12 to 18 months and, therefore, contain consumption growth.

Finally, and this seems to me to be the crux of the matter, the consumer has become highly leveraged and his consumption may finally succumb to his debt load. Now, I am aware that many analysts and strategists will dismiss this concern, arguing that the consumer has been highly leveraged for a long time and has so far continued to spend and will therefore continue to spend in the future. To my mind, this line of argument is reminiscent of U.S. strategists who, in the spring of 2000, predicted that the stock market would continue to rise, based on the fact that it had been going up for 18 years in a row.

Responding to a piece by Gene Epstein, who writes a weekly column about economic issues for Barron's, which stated, "Over the 56 years since 1946, consumer borrowing habits don't appear to have changed at all," The Prudent Bear's Doug Noland recently produced the following figures: In 1946, as a percentage of national income, total personal sector liabilities were 31%, non-farm mortgages 13%, and consumer credit 5%.

At the end of 2001, however, total personal sector liabilities were 133% of national income, non-farm mortgages 70%, and consumer credit 21%.

Non-farm corporate liabilities stood at 44% of national income in 1946, compared to 101% at the end of 2001; total mortgage debt was 23% compared to 93%; security credit 3% versus 10%; state and local government debt 7% versus 17%; and total credit market debt 192% versus 359%.

In addition, in 1946, the personal savings rate stood at 9%, compared to around 2% now.

Noland points out that, in what has become a historic boost, it has taken less than nine years for the money supply to double. Noland concludes: "The service/consumption-based U.S. system is becoming only more monetary in nature - only progressively dependent on rampant money, credit, and speculative excess." The economist William Ropke explained in his book Crises and Cycles (London, 1936) that the "qualitative" distribution of the money stream may become a factor of instability. Referring to the 1920s and the factors which led to the Depression, he wrote:

"This period, which has been followed by the severest crisis in history, shows, on the whole, a price level which was slightly sagging rather than rising. [The same as in the 1990s - ed. note] How, then, can there have been inflation? Owing to decreasing costs following on technical progress, prices would have fallen if an amount of additional credit had not been pumped into the economic system. Hence there was inflation, even if only of the relative kind. But it can be perfectly well argued that the quantitative effect of the inflationary credit expansion was considerably aggravated by an abnormal qualitative distribution of credits. One case is the great expansion of installment credits, which gives the impression that the Federal System was trying to administer the heroin not only per os but also per rectum.

"Another example is the real estate market, which was grossly oversupplied with credits. The worst and most conspicuous case, however, was the stock market speculation, which was the leader on the road to disaster. For purpose of illustration, it may be mentioned that the volume of brokers' loans rose from 1921 to 1929 by about 900 per cent. We may conclude, then, that the last American boom is a striking example of how the disequilibrating effects of variations in the volume of credit may possibly be greatly aggravated by peculiarities in the qualitative composition of the stream."

I have reproduced Ropke's explanation of the 1920s' boom and the following depression, because it immediately becomes obvious that we have a very similar situation today - only with far worse credit excesses and far more "abnormal qualitative distributions of credit".

This time, however, the problem is not so much the expansion of brokers' loans, but consumer and real estate credits as well as the leverage that was built up through government-sponsored enterprises - Fannie Mae, Freddie Mac, etc. - the derivatives markets, and corporations' special- purpose entities.

I hope the reader will understand that the current mortgage financing boom and consumer credit explosion is simply not sustainable in the long run and that, at some point, credit expansion in the consumer and mortgage sector will slow down, as it has in the last two years in the corporate sector. The consequences of such a slowdown will obviously be that consumer spending will have to slow down very considerably, which will inevitably hurt the economy, but hopefully will redress some of the external imbalances.

So, whereas economists who point out that the consumer is in great shape may be correct now, sometime in the future the consumer may wake up with a terrific "debt hangover," which will force him to retrench.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.