Wednesday, May 7, 2008

Slow Crunch Time

No wonder consumer confidence is in such a sorry state.

Americans are now forced to spend a large and rising portion of their disposable income on necessities: food, fuel and debt service. Such expenses now require 31.5% of disposable personal income (DPI), the most in 25 years. While outside factors may also affect consumer sentiment (red line), it closely tracks spending on necessities (blue line). As prices for such items rise faster than income, less money is left over for everything else and confidence drops.

Both measures are now back to levels last seen in 1982-83 (click to enlarge).

Unless retail prices for necessities soon reverse dramatically (unlikely), or incomes rise faster than food and fuel inflation (even more unlikely), consumers will stay on the defensive. They will continue to cautiously reduce discretionary spending and thus pressure the overall economy, which is now running on "slow crunch time". All those expecting a quick turnaround in 2008 had better adjust and learn to be patient.

There is an added dimension to this picture: the possibility for increasing demands for higher wages and salaries, to make up for lost purchasing power. If this situation continues unchecked for several more months, I wouldn't be surprised to see a resurgence in union activism, particularly in sectors where lower incomes predominate, e.g. retailing, food service and social services.

Therefore, crunch time applies to the Fed, too. The threat of structural inflation, not seen in a very long time, is already posing a serious challenge to the Fed's current policy. Highly negative real interest rates (Fed Funds at -2.00% now) may facilitate the salvage of the shadow banking system, but they also create inflation where it is felt the most by those that can afford it the least: essential food and fuel goods.

Tough choices ahead for the Fed.


  1. Which component will increase the most? If Fed chooses to inflate their way out of this mess then food and fuel go higher. If they ratchet up rates to protect the dollar, debt costs go higher but food and fuel will fall (along with the economy).

    With savings lower than in the 70s, how will the US fare in a deep recession?

    And how do I protect my savings? GLD? DBA? SKF? SDS? TIPS?

  2. sc said... "With savings lower than in the 70s, how will the US fare in a deep recession?"

    I think we are seeing the first sign of things to come.

    Seriously, some States are now considering borrowing to fund their retirement obligations... this tells me it is human nature itself we are up against. The 'party' people always have been in denial and they always will be as long as denial works (that whole Darwinian thing again... thought the term 'party people' may be a little unfair since most probably felt they were 'doing the right thing' at the time-- a little like unwanted pregnancy).

    After everyone is done blaming Bush for their bad choices, they will just find a new target to blame-- the ability of the human mind to decieve itself is truly stunning.

    Why look ourelves in the mirror; our politicians promise self analysis is unnecessary.

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  4. I believe the FED has already made its choice.

    Jason B

  5. "After everyone is done blaming Bush for their bad choices,..."

    I'm not gonna be done blaming Bush and the Republics for a long, long time. I've lived cautiously and within my means and it is NOT my fault we're in this situation. We're not gonna shut up until those that caused this mess are held to some degree of accountability.


  6. An invincible force is butting heads with an immovable object what with the Fed's artificially spurred increase in raw materials that is now passing through to us consumers. Ultimately, and it won't be long this process is deflationary, and I posit that the invincible force, that would be the Fed's artificially engineered inflation, is going to give way to the immovable deflationary object.

  7. Thai,
    I use the term for people who disregard future consequnces of their actions just like someone drinking too much at a party. They never seem to remember the last hangover never mind the highway fatality statistics. Having too many kids, getting into debt, not watching your health; these are all symptomatic of party people mentality although none of them would be considered partying.

    And your right, it is human nature which is why I've been a lifelong pessimist. Too few are willing to make the necessary sacrifices until it is usually too late to do the most good. Carpe Diem! Robin Williams said so.

  8. Hi guys,

    I just nailed the time of peak oil (10:45AM EST, May 8th, 2008). I am in Hell's camp now.

    "And how do I protect my savings? GLD? DBA? SKF? SDS? TIPS?"

    What about plain old cash??


  9. The Fed has made its choice. The US citizen as well.

    Standing as they do with a massive debt profile and a supposedly inflation-neutral equity profile (housing and market), most American economic participants are ready and clearly preparing a South-American journey.

    It won't be a pleasant trip.

    America need cash on a daily basis. Of course, rates will move their way up. Way above real inflation (yes shadow stats ones).

    Believing that the FED is fixing the rates when the money comes from abroad is a long-lasting illusion.

    It won't last. When the money comes from abroad, int'l markets decide for rates. And they will.

    I hope that a Volkerish Fed could make it. But its efforts stalled.

    Too much has been lost in just too little time for foreign lenders not to change the whole market sentiment. Accross the board. From Beijing to Zurich.

    It's going to be bloody. Much more than any organized Fed-based policy. Even a harsh one à la Volker.

  10. I think the ultimate endgame is synopsized thus:

    Foreign lenders have money, Americans have guns.

  11. So Hel,
    Are you expecting US imperialism to degenerate into out-in-the-open extortion? Iraq was one thing but to try and grab all the marbles might provoke more of a reaction (stinger type missles finding their way into Iraq and Afghanistan). The free ride US forces have been having afainst unarmed resistence fighters might come to an abrupt end.

    BTW, w/respect to 60% of PhD's going to overseas candidates, go to:

    and click on "how it works"

  12. "americans have guns"

    This isn' the days of the British Empire. The natives are no longer just armed with sharpened mangos.

    Yesterday I heard a war correspondent who had visited Afghanistan unembedded for the last 25 years. He was adamant the West couldn't win.


  13. Greenie-
    What convinced you today at 10;45 AM EST? And did you mean physical cash or do you trust the FDIC?

    "the ability of the human mind to deceive itself is truly stunning"

    Treacherous neurons! Let's drink them into submission!

    So....Grand Theft Auto IV (video game) made $500M in its 1st week of sales. It gets me thinking: why don't we offer citizens total life support so long as they don't leave the house or ever reproduce. No work, all the electronic stimuli they want, and we'll deliver fat-laden pseudo-food/beer/meth to their door whenever they wish. It'll be cheaper than prison, they'll go into cardiac arrest by their late 30's, the gene pool will be cleaner, and responsible citizens will inherit the world.

  14. Hell said: "Foreign lenders have money, Americans have guns".

    Hell, you are sounding like Niall Ferguson!

    To the extent I understand your point, I too agree : the 'it is what it is' paradox the world finds itself in today is indeed fascinating (not sure the right word). The whole thing Reminds me of posting on today's debt situation vs. the Ottoman Empire's; the analogy is there, AND our situation differs.

    In a world where a Democratic congress is pushing to bail out subprime flippers by borrowing more money (to top it off a Republican President is borrowing money from voters so he can give a rebate to the same voters) and Democratically controlled states are trying to borrow to fund their retirement plan shortfalls, how 'responsible' will elected representatives be when faced with defaulting on foreigners vs. holding the line with their constituents? I do not think this is a Republican vs. Democratic issue by the way, just that BOTH partys are irresponsible fiscally)

    I don't think yoyomo's 'party people' have the foggiest idea the US has even promised to come to the military defense of Taiwan should China ever attack (indeed most probably have no idea where Taiwan even is).

    We live in interesting times.

  15. I think Hel has some 'splainen to do, we can't just let such a cryptic yet profoundly consequential statement slide just like that. If any of you have visited, this sentiment of using military power to rape the rest of the world is very popular with a sizable segment of the commenters at that site; borrow to the max abroad and dare them to try to collect.

    I'm curious too, did you really change your mind or are you being snidly sarcastic?

    Unfortunately your idea would never work because the smartest people have the fewest children (they see what's coming) and vice versa. You would have to pull an Indira Ghandi and send the troops into the fields (or suburbs) with their snippers.

  16. At work today, we were laughingly bemoaning America’s ridiculous indebtedness, when one of us said...”waitaminut, now I know how this ends. The public & private sector, and consumers, keep refinancing their debt until the cusp of the 22nd century...setting the stage to answer that 40-year question: How did it come about, per the original Star Trek show, that no one uses money anymore by the 23rd century?

  17. If the U.S. PTB think the U.S. can move from our traditional foreign policy MO- a thinly veiled the protection racket, to something more overt, we are all
    in for the rudest of awakenings.

  18. "I'm curious too, did you really change your mind or are you being snidly sarcastic?"

    Not being sarcastic. My timing could be a bit off (by days), but I believe we are really close to peak oil. If this prediction comes to be true, I will buy a hummer during Xmas to celebrate :).

    I am happy with FDIC cash. The sky is not falling (yet). Physical cash is too much trouble OTOH.

  19. Unfortunately, our cold war era all volunteer military is not up to the challenge of asymmetric warfare, with shoulder launched missiles (see Israels loss to Lebanon last year) and IED/VBIED's. Get ready for the propaganda that proceeds a draft. Not that more soldiers will help. More people doing the wrong thing will not get the right result.

    We are stuck in the previous paradigm economically and militarily.

    Jason B

  20. Hel,
    I can't believe you're going to leave us all hanging on that little bit of truncated haiku; I thought for sure once you got the discussion going you would weigh in with your thoughts on the consequences of such an approach to commerce.

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