Jesus Saves, But Americans Don't

 Will Katrina be the pin that finally pricks the bloated bubble that is the U.S. economy? Perhaps. Only time will tell. But there were ominous signs that we're headed for recession (if not worse) well before Hurricane Katrina slammed into the Gulf Coast.

For example, the Commerce Department recently reported that in July personal incomes rose 0.3%, while spending shot upward by 1%. The net result was that savings from disposable income fell into negative territory, at minus 0.6%.

Some economists (undoubtedly those who always see the glass as half full) have proclaimed this to be of little significance, given that savings rates have been plummeting for decades--from 9% in 1985 to less than zero now. And they may be right. The difference between slightly above the line and slightly below might be negligible and concern about the latest drop primarily psychological in nature.

However, it's also worth noting that this is the first time we've visited negative ground since the Great Depression, with only one exception: October 2001, an anomaly caused by the government encouraging consumers to spend in response to the 9/11 attacks. Even during the go-go '90s, when people were flooding the stock market with what seemed like all available cash, the savings rate still averaged around 5%.

Another way of looking at this is to examine the relationship between households' after-tax income and their expenditures on consumer goods/services and residential investment. Since the end of World War II, that figure was always a surplus, peaking around $300 billion in 1993. But in 1999, it slipped into deficit for the first time. After bouncing around for the next two and a half years, it then plunged precipitously. Based on the data from the first two quarters of 2005, households this year will spend a whopping $400 billion more than they make.

Or consider household liabilities as a percentage of disposable income. They were 4% as recently as 1993. Now they're over 12%, a 60-year high. That kind of debt might not be disturbing if asset values had kept pace. They haven't. Total household liabilities as a percentage of the market value of total assets: over 18%, another 60-year high.

What do all these grim statistics mean?

They mean that American consumers have stretched their buying power to the limit. And when they reached that limit, they blithely moved beyond it, by piling up more and more debt (rather like the federal government).

Unlike the federal government, though, private citizens cannot "solve" their problem by printing more money. Faced with these kinds of deficits, the only choices available are to sell off assets or increase the debt load. So far, most Americans have chosen the latter path, largely because of the real estate boom.

We've spoken our piece on that boom (or, more aptly, bubble) in recent issues. But in the context of this article, another newly released figure jumps out at us. Despite interest rates that have been at historically low levels, property owners have pushed households' principal and interest payments as a percentage of after-tax income to 13.5%. That's double what it was 15 years ago and is--you guessed it--another record high. It starkly illustrates that these people are desperately praying that 1) low interest rates will last forever and 2) housing prices will appreciate by leaps and bounds, also forever.

Neither will happen. At some point, it will cease to be a seller's market, and those who have waited too long to cash out will be left holding a very unpleasant bag.

"[Consumers] can't continue to spend beyond their income indefinitely," says Dean Baker, co-director of the Center for Economic Policy Research. "If people are building up large amounts of debt, you reach a point where they can't continue."

True, and regarding the likelihood of reversing these trends, even the best-case scenario isn't very good.

Roger Ferguson, vice-chair of the Fed, did his best to conjure one up when he said, "If households, on net, take steps to return the saving rate closer to the middle of [the historical] range, which, I might add, would provide welcome support to capital accumulation, then a sustained period in which consumption grows more slowly than income would result."

Pretty tepid, not to mention unlikely. Still, our own best-case view isn't even as rosy as that. Whether or not the damage done by Katrina serves as a trigger, we believe it's inevitable that people will soon be forced to cut back on spending, and when that happens our consumer-driven economy will fall back into recession, in which state it will grind along for the foreseeable future. That's the best we can hope for, remember. The worst case includes words no one wants to speak, like deflation or depression.

Family and self-protection in this environment involves the same advice we tout here regularly: paying down debt, locking in low mortgage rates, selling all speculative real estate, exiting most stocks and mutual funds, investing in precious metals and the companies that produce them, and doing as much personal belt tightening as you can.



We can't say it often enough: The U.S. is bankrupt... and it's only a matter of time until this news will make the headlines. When, we can only imagine.

But given that...
... the housing bubble is on its last legs
... Americans are spending more than they earn
... oil prices in the upper $2 range might be here to stay
... and President Bush just announced $200 billion in Katrina disaster relief, with no hint where that money would come from
... this day cannot be too far off.

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Posted 09-20-2005 2:22 PM by Doug Casey
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