A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Friday, September 6, 2013

Transcript: Two or Three Or Four Economies, or economic classes, Sept 6, 2013

Today, The resilient US consumer rant from Lee Adler
Some notes on aggregation, with the assistance of Jared Bernstein
and a bit of the history of money, the free silver movement that nearly took the White House
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The Resilient U.S. Consumer Myth

by Lee Adler, Wall Street Examiner

That’s right folks, US consumers are doing just great. In fact, on a real per capita basis, retail spending (ex-gasoline sales) in July was up 3.9% from last year and up 7% from the July 2009 recession low. In fact real retail spending per capita has recovered all the way back to where it was in 1997. That’s right, the average US consumer is consuming retail goods at the same rate he or she was just 16 years ago.

The mob is only concerned with how top line retail sales did this month. They’re really looking at inflation and total spending as driven by the spending of the top 10%, not growth in the volume of sales, and not broader growth in real demand.

The idea of the “resilient US consumer” is a myth. Only the top 10% is resilient. The other 90% is losing ground. Real Retail Sales ex-Gasoline Per Capita for July 2013 was $659.98 in 1982 constant dollars. That was 3.9% above the year ago level. That sounds great, but months with big gains tend to be followed by givebacks in succeeding months. The 7% total gain over the past 4 years is probably a more accurate representation of the trend. The real rate of growth is at a snail’s pace, and some of that comes from external factors, not increased spending power of the typical US consumer.

Retail sales per capita are skewed by increased spending by the top 10% of the income spectrum, and by shopping tourism as foreigners come to the US to shop to take advantage of a weak dollar or lower prices. For example, Canadians cross the border in droves to shop in the US. With the Canadian dollar recently weak versus the US dollar, that trend increases.

Then there is the “wealth effect” that accrues to the small percentage of US Americans who actually own stocks, or a house that isn’t under water. Bernanke’s stock market bubble has disproportionately benefited the few who own stocks. No doubt they’re spending more, and some of this is trickling down to the jewelry store clerks and luxury car salesmen that serve them. But it’s clearly not helping the millions who work at WalMart and competing retailers and those who supply those chains, as their wages stay stuck near minimum wage, with fewer hours and even fewer benefits. It’s highly likely that most of the increase in real spending has come from those at the top, not the majority, who simply struggle to pay the bills as their wages are suppressed in a system where labor consistently trends toward a lower value.

Considering this data ask yourself how the Fed’s money printing, which has clearly fomented asset bubbles in stocks and housing, would help more Americans get good paying jobs that will enable them to halt the long term slide in their standard of living. The last bubble in housing did not do that. In fact, it made things worse for most Americans. Only the savvy speculators and crooked banksters at the heart of the easy money driven Ponzi scheme did better. Everyone else simply treaded water through the bubble. Then when it collapsed, they got crushed. Most people have not caught up during this “recovery” phase.

Why would the Fed expect the effects of the the bubbles it has blown this time to be any different? That just defines insanity. Declaring that the economy is doing better and using that as an excuse to reduce QE, as it appears they are about to do, would be just as delusional, and dishonest to boot. I guess we just have a bunch of crazy liars making policy.
That from Lee Adler

Now from Jared Bernstein and Tom Keen via Bloomberg:


Every once in awhile data series conflict. In the case of most aggregate data and the measures of economic disparity, they have come together in a train wreck.

GDP, at two percent growth, savings rates up from the pre-crisis levels, aggregate income growing, top line unemployment trending down. Do these data really describe the economy in which we live? Now, I am not talking about the shortcomings of GDP as a measure of well-being in terms of not accounting for environmental degradation or resource depletion, treating bads as goods, treating the product of the health care sector as the sum of inputs rather than measuring output, things like that. This is simply a problem of aggregation.

Income disparity -- the difference between the rich and the poor -- the 1% and the 99% -- that gap is grotesquely wide. Even more so with wealth disparity. It's a tale of two economies, and aggregating the data convinces us we are in recovery rather than sailing toward the edge in a damaged ship.

Were we really growing at 2%, wouldn't we have investment, capacity back to normal, reduced dependence on the safety net? Instead with have companies buying back stock, not investing, and record high use of food stamps and disability.

From the demand side, it is the middle class economics that matters. This is the support to investment, both private and public, as it bolsters consumer demand and tax receipts. Strength in the middle class is stabilizing. The effect of stimulus and of increasing private investment as well, depends on the propensity to consume. A stimulus which is immediately saved is not a stimulus, because it does not cause any further economic action. Thus the Bush 2008 tax cuts went to pay down debt, increase savings, or was spent on cheap imports. No boost. The ineffectiveness of monetary policy based on interest rates is that it cannot get below the price at which investment is profitable, because there is no demand for investment and plenty of current capacity that is cheaper than any new capacity.

But a coherent statistical description is not, as Jared Bernstein says here, merely a matter of taking it down to the household level. Rather, it is a matter of class. Aggregation conflates the whales with the minnows and comes up with salmon that do not exist. Class level: the poor, the working class, the professional class, the elites. Characterizing economic behavior by class is valid because people within them share financial and social conditions and respond to them in broadly similar ways. There is no representative agent for the entire economy, but there are representative agents for broad classes.

And the economy responds to class. As we said, a broad middle class has been shown -- at least by history -- to be strong, stable and vigorous. The structure we now have, a prospering elite, topped by the super-rich, alongside a substantial impoverished population and a contracting middle class has been shown -- again by history -- to be fragile and unstable, both socially and economically.

The high-savings rich are withdrawing spending from the society, even as their incomes increase. High household debt among the middle class is reducing spending. Both reduce the multiplier. When government doesn't invest directly and businesses don't invest, excess savings by some mean reduced income to others. But we sail on. Two percent GDP is not great, but it is positive. Too bad it is meaningless.

Now to the Gold Standard. For another project I did some research on money and the gold standard. The following is an excerpt tied to the Free Silver movement of the last three decades of the 1800's.

The Free Silver Movement.
Silver was the common standard for money between the fall of the Byzantine Empire and the end of the 18th Century. The colonies and early states relied on pieces of eight for currency, a silver coin minted in Mexico. (The two vertical lines through the S on the dollar symbol $ are derived from this period. Pieces of eight were legal currency in the U.S. until 1857.

The silver stocks of the new American state were depleted rapidly in payment for the Revolutionary War, and gold came into common usage. With big silver strikes in the West, however, silver made a resurgence as a commodity money until the Coinage of Act of 1973, when it was excluded from the money supply in favor of gold. Called “the Crime of 1873” by advocates of silver, the Act was accompanied by the onset of the Long Depression of 1873 – 1879, and the Great Sag or the Great Deflation which lasted into the 1890s, and by a polarizing confrontation between the moneyed interests of the Northeast, including the Robber Barons and the titans of Wall Street, and the Populist farmers of the South and Midwest who aligned with the silver miners.

Enormous economic hardship visited farmers, whose debts increased in real terms with the deflation caused by a money supply restricted to gold. Increasing production to attempt to meet debt obligations only lowered farm prices. In 1896 a 36-year-old Congressman from Nebraska addressed the Democratic national convention and delivered by many accounts the most famous speech in American political history, the “Cross of Gold” speech, which concluded:
“If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”
Opponents, including the leadership of the Democratic Party, did not oppose bimetallism on principle, but on the premise that it could only be arranged by international agreement. Bryan ran a strong campaign, but lost to William McKinley, and the gold standard remained in place into the 1930’s. Then it was repealed and eliminated virtually overnight.

Franklin Delano Roosevelt came into office in early March 1933 with the plan to repeal the gold standard firm in his mind, in spite of the collected wisdom of his advisors. One called it, “the end of Western civilization.” [FN] Roosevelt was determined to “take control of the currency.” He pointed to the hoarding of gold by individuals as a root to the run on the banks that threatened the entire system. First FDR imposed a bank holiday, closing the banks for a short period, and reopening only those which were viable. He then directed that all gold coin and bullion be returned to the Federal Reserve. He abrogated the gold clauses in private and public contracts that required payment in gold. The federal government became the only legal holder of gold, so while its value was set at $35 per ounce, it was a meaningless number to those within the country. These and other moves allowed the volume of currency to expand. A good majority of economists now counts the repeal of the gold standard, expanding the money supply and reversing the deflationary cycle as the most important single step to recovery.

Although it was illegal for citizens to own gold, foreigners could redeem dollars received in trade at the Fed’s “gold window” until 1971, when President Richard Nixon took away any convertibility and allowed the dollar to float against other currencies. The dollar became the “reserve currency.” The practice of converting dollars gained in trade to gold changed to converting them to interest-bearing Treasury bonds, and this is the source of the debt now owed to America’s trading partners.

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