Like high-wire artists, Americans are teetering on a thin line. They dare not make a false move, or they’ll topple over. But unlike high-wire artists, Americans have no net under them. When they tumble, they’ll smack into the ground…hard.
If consumers stop consuming, the air goes out of the bubble and the economy falls into a sharp slump. Consumption makes up 70% of the economy. Without rising consumption, there can be no more growth and without growth, there are no new jobs, and no new consumer income. There is nothing for consumers to spend, and no way to boost consumer spending.
But, too much consumption can be fatal, too. If they spend too much, too fast…they set in motion another dreadful scenario. Prices will rise, forcing them to desperately spend even faster to get rid of the depreciating money. Inflation will force the Bernanke Fed to clamp down on interest rates — bam! — pop goes the bubble economy.
As the debt on their shoulders becomes heavier, walking the line steadily becomes harder and harder. Consumers stagger; they threaten to fall face down any moment.
That’s why we keep a close watch on this bubble heart of ours. We keep our eyes wide open all the time.
In yesterday’s news came word that consumer incomes were up more than expected in January: plus 0.7%. This good news was followed by a headline: “Inflation eats up most income gains.” And then, we read an article explaining that consumer spending rose 0.9%.
What keeps consumers going is not more income, but more debt. Even when incomes go up “more than expected,” they don’t go up fast enough to keep up with how much consumers want to spend.
What has kept money flowing for the last five years has been the real estate market — the real black heart of the bubble economy. Without all the concrete, plastic, granite counter-tops, sales agents, home equity lines and mortgage brokers, the imperial economy would already have keeled over exhausted. And the longer it goes on, the further in debt people get, the more expensive houses become and the more uncertain the poor householders’ steps become.
So, we keep a close eye on the real estate market, which is hardly necessary because everyone else seems to be watching, too. We only have to listen to what they’re saying to figure out the way the story is going.
From California comes news, courtesy of CNN, that house sales went down 24% in January, and on the other coast, the Boston Globe tells us that “Mass Home Sales Plummet 21%.”
Meanwhile, USA Today adds its bit: “Real estate continues to cool.”
Patrick Newport, the U.S. economist for Global Insight, even has a diagnosis: “January’s weak existing- and new-home sales numbers are the strongest evidence yet that after five remarkable, record-setting years, the housing market is in decline.”
Adds USA Today: “The drop in home sales defied unseasonably warm weather and cash and give-away incentives from builders that had raised hopes for a brighter showing.”
“Imagine if the weather had been terrible,” said Phillip Neuhart, economic analyst for Wachovia.
Sales of existing houses fell in January, for the fifth month in a row. The number of late mortgage payments is rising. Borrowers in the “subprime” category, usually people without much money, which is to say, those most affected so far by the exodus of wealth and power from West to East, are having trouble paying. Delinquent subprime loans are up 10%. Housing loan applications are down, despite lower mortgage rates.
“We’ve got a ton of inventory,” said one real estate agent in Wisconsin, perhaps speaking for the entire brethren of house mongers nationwide.
So, we’re waiting, watching, and wondering. How long can American consumers keep doing their balancing act? And what happens when they can’t anymore?
The ripples will be felt through the entire economy — and it’s not going to be pretty:
• Recent government data shows that crude oil inventories have risen 9.1 % above the year-ago level. However, crude futures rose today, up to $62.70 a barrel, supported by quite a few geopolitical factors.
“With Nigerian problems, uncertainty about the Iran nuclear program before the IAEA (International Atomic Energy Agency) meeting next week, and the overhang of the Saudi attack and an OPEC meeting on the 8th, we are in for a lot of volatility in prices,” said James Williams, an economist at WTRG Economics.
Although six of the nine foreign oil workers that had been taken hostage were released yesterday, the Nigerian militants threatened new attacks that aim to cut off all oil production in Nigeria.
“The inventory numbers continue to point to lower prices, but the lack of spare capacity and increased risk of supply interruptions continue to support the price of crude,” continued Williams.
• We were in Germany, yesterday, wondering how smart, industrious, educated, civilized people ever allow themselves to get into a jam. There was no country more dynamic, or more advanced, than Germany in the early 20th century. Who were the world’s top philosophers? Germans! Who were the world’s top mathematicians? Germans. Who were the world’s top physicists, doctors, technicians, and strategists? They were Germans, too. Even the top economists were Germans (or Austrian). In the arts, the sciences and in commerce, Germany led the world. And where it was not clearly in the lead, it was giving the leader a good race.
But little by little, the Germans began to toy with their own good fortune. They began to forge their own chains. At first, they were so comfortable, so light and so reassuring, that they could not be felt. They could almost be trinkets or jewelry. Many thought they were. Later, after more and more links had been added, the trinkets became so strong they could not be broken.
Even toward the end, when Hitler was foaming at the mouth like a madman and his top officers met with him with guns at their hips, not one of them unpacked his heat and let der Fhrer have it. Who would have deserved it more than Hitler? How could a man have done the world — or Germany — a bigger favor? And yet, by then, the chains had become so heavy, even the toughest, battle-hardened officer could not raise his hand.
• We’re thinking now of our own knuckle-headed Homeland. There too, consumers are hammering out their tinkling little chains of debt. So far, the chains are light and so smooth, they almost feel like a soft, gauzy net protecting them from that unreal world outside. But the world outside will not disappear; instead, it gets more ugly and more real. As debt builds up, the slim little chains get fatter every day — chains that this generation and its children and their grandchildren will have to drag around for a long time…chains that will only grow heavier with every year.
A Polish friend told us the national debt in Poland was 40% of GDP. “Shameful,” she said.
But the official national debt in America is nearly 60% of GDP and rising faster under the Bush administration than under any administration America has ever seen.
Clang. Clang. The hammers come down on the anvils, day after day, beating out more chain links. These are not just chains of debt, but iron manacles of servitude and blinded obedience.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.
