The Consumerati Future

An excerpt from an article by guest commentator Dan Denning of PrudentBear.com:

“Say what you will about Old Europe politically. Economically, there are still problems too, namely a lack of consumer spending to drive growth. But maybe most consumers in Europe are less sure than their American cousins that the future will be infinitely better. They are less willing to pile on credit today and pay the interest on it with declining real wages. Americans feel no such compunction, and finance their high expectations with rising interest rates.

But borrowing money does not create wealth automatically. Business investment generally does. And in 2006, like in 2005 and 2004, a lot will come down to whether businesses invest. "U.S. growth may hinge on business." Duh. The story goes on to point out that with falling house prices, business investment should step in to fill the breach and drive the economy. New investment will create new incomes and everything will be fine.

But wait, there's more! "Despite high debt levels," we are told, "it is still safe to say that Americans will somehow continue to buy on credit, and with energy prices falling, wages now diverted to gasoline purchases should be freed up to spend on the array of goods and services that drives the economy."

That's right. Energy prices will fall. Higher interest rates will not dent consumer spending. What's more, higher interest rates will not deter businesses from borrowing either. Quite the contrary. Businesses will spend! Spending and consuming rather than saving and producing will be vindicated as the surest way to wealth in a competitive world.

People who think like this are the same kind of people who took videos of the 2004 Boxing Day tsunami as it rolled toward them. They are doomed.”

What if the other shoe drops and the piper calls for his money? If it doesn’t happen in life, it certainly will in death, and your heirs will be stuck with the bill. My in-laws stuck us with $20k in debt that could not be negotiated down, sold off, or repossessed out of.

That is the kind of scenario the entire country is facing, courtesy of the trade deficit, unfunded liabilities, and general bookkeeping sleight-of-hand. Uncle Sam borrows, and we children of the U.S. are expected to pay his bills when he finally dies off.

If the ability to borrow to drive consumer spending weren’t so prevalent here, we, too, would be in the same boat as Old Europe—no growth, and lots of socialized spending through higher levied taxes. Right now, foreign countries buying our bonds and notes is the only thing preventing this from happening, but it will end sometime—perhaps sometime soon. When bonds and notes from other countries besides ours look more attractive, guess where our “endless supply of income” will go? Answer: away from here, leaving the specter of economic collapse in its wake.

Mr. Denning said it best—we’re doomed unless we reverse this course of borrow-and-spend and start piling on the savings in short order.