Gary North: Verbrauchervertrauen irrelevant

verfasst von Miesespeter, 06.08.2003, 12:45

--> Gary North's REALITY CHECK

Issue 262 August 1, 2003


THE KEYNESIAN MYTH OF CONSUMER CONFIDENCE

In July, consumer confidence fell like a stone. The
Conference Board, which somehow gets people to pay for its
surveys, announced that consumer confidence in July fell by
seven percentage points, to 76.6, down from 83.5 in June.
That drop, I assure you, is a major hit. One-month shifts
of this magnitude are rare.

The Expectations Index fell from 96.4 to 86.4. I have
no idea how the Expectations Index differs from the
Consumer Confidence Index, but it sure sounds bad, doesn't
it? Down, down, down.

When numbers move this much, someone at the numbers-
issuing organization feels compelled to say something.
This was the case at the Conference Board.

"The rising level of unemployment and sentiment
that a turnaround in labor market conditions is
not around the corner have contributed to
deflating consumers' spirits this month," says
Lynn Franco, Director of the Conference Board's
Consumer Research Center."Expectations are
likely to remain weak until the job market
becomes more favorable."

http://www.conference-board.org/economics/consumer.cfm

Readers of this press release are supposed to think
this is a profound insight, and perhaps some readers do. I
don't.

Let's begin with what ought to be obvious: The
American economy began falling in March 2001. The country
has lost three million jobs. The recovery officially began
in November 2001. Jobs have continued to disappear
despite the official recovery. Unemployment in May was
bad, worse than it had been a year before. Unemployment in
June was bad, worse than it had been the year before. But
in July, consumer confidence collapsed.

Don't tell me it's the job market that produced a seven
point decline in one month -- 10 in the other index. Grab
some other economic explanation out of the air. There are
always plenty of them floating around, like pollen in
spring.

Mr. or Miss or Mrs. or Dr. Franco -- Lynn is a gender-
neutral name -- is just doing his/her job: providing
newspaper reporters with something to write. This keeps
reporters occupied and off the welfare rolls -- a worthy
goal, indeed. But it does not add to our understanding of
consumer confidence and its effects on the economy.
Frankly, nothing I have ever read about consumer confidence
has added to my understanding. The entire concept is on
the misunderstanding side.

There are lots of perfectly good reasons to worry
about the U.S. economy. The rate of consumer confidence
isn't one of them. Let me explain.


HAND YOUR TEENAGER A CREDIT CARD

At some point, your teenager gets your credit card,
"for emergencies." Usually, this is when you send him/her
off to college -- a four-year time of partying that will
cost you between $40,000 and $140,000 in after-tax capital
per teenager.

Note: That a parent can buy the same academic
education for his child for about $8,500
impresses very few parents. Most of them don't
know about the seven gigantic loopholes ("no
parties") in the American higher education
system, and even when they do, their children use
guilt manipulation techniques on them to get the
parties. For my report on this, click here and
click SEND:

mailto:discount-colleges@kbot.com

Let's assume that your teenager remains confident
about the future. And why not? You have handed over the
credit card and have also guaranteed him/her four more
years of financial support: tuition, room, board, books
and boola-boola. This stream of income will continue for
as long as he/she maintains a C average in some academic
major, which in (say) education can be done by anyone who
can fog a mirror. Consumer confidence? I guess so!

I offer two scenarios. First, your teenager scholar
somehow gets a part-time job on campus and starts saving
half the after-tax paycheck. Second, your teenage scholar
doesn't get a job, but starts spending $1,000 a month with
your credit card. Which scenario do you prefer?

The Keynesian economist, who follows the economic
theory of John Maynard (Candy) Keynes, who had no children,
will do his best to persuade the public that scenario #2 is
best for the economy. Because he is a macroeconomist,
studying only the Big Picture, he really doesn't care what
happens to you. For him, your opinions are irrelevant
until such time as you take back your credit card.

If, in a moment of enlightened self-interest, you and
other similarly afflicted parents call your buoyantly
confident teenage consumers and bring the unwelcome news
that you have just cancelled the line of credit, the
Keynesian economist will begin to issue warnings.
"Consumer confidence falls.""Recession ahead.""Falling
employment looms.""Economic slowdown beckons." And so
forth.

Let's say that the experience of having the line of
credit cut off creates a new sense of responsibility in
your teenager. He/she begins to think about the reality of
a world without debt. He/she becomes future-oriented
overnight. (Understand, I'm offering all this strictly as
a hypothetical example.) He/she goes out to get a job,
whereupon he/she starts investing 50% of the after-tax
income.

Absolute panic now strikes the Keynesian economist.
"Consumer confidence disappears.""Depression ahead."
"Starving mobs of unemployed workers just around the
corner.""Economic collapse imminent."

Here is the Keynesian's problem: He thinks that
immediate consumption drives the economy. Anything that
threatens to reduce immediate consumption therefore
threatens the economy. When people stop buying consumer
goods on credit, this worries the Keynesian. When they use
part of their income to pay off existing debt, this
terrifies the Keynesian economist. When they start saving
part of their income, having lowered their debt to zero,
this reduces the Keynesian economist to Chicken Little. If
he had any money to invest, which academic economists
rarely do, he would call his broker and tell him to short
sky futures.

You think I'm exaggerating. Me? Exaggerate? Let's
hear from the Master himself, in his most famous book,"The
General Theory of Employment, Interest, and Money" (1936).

Pyramid-building, earthquakes, even wars may
serve to increase wealth, if the education of our
statesmen on the principles of the classical
economics stands in the way of anything better.
(p. 129)

If the Treasury were to fill old bottles with
banknotes, bury them at suitable depths in
disused coalmines which are then filled up to the
surface with town rubbish, and leave it to
private enterprise on well-tried principles of
laissez-faire to dig the notes up again...
there need be no more unemployment and with the
help of the repercussions, the real income of the
community, and its capital wealth also, would
probably become a good deal greater than it
actually is. It would, indeed, be more sensible
to build houses and the like; but if there are
political and practical difficulties in the way
of this, the above would be better than nothing.
(p. 129)

"To dig holes in the ground," paid for out of
savings, will increase, not only employment, but
the real national dividend of useful goods and
services. (p. 220)

The world economy, from the 1930s until today, has
rested on the economic theories of this man. The result
has been the vast expansion of taxation and regulation,
accompanying the depreciation of every national currency.
He, unique among economists, wrote his own epitaph and
the epitaph of every society that embraces his principles,
in the final paragraph of his magnum opus.

But apart from this contemporary mood, the ideas
of economists and political philosophers, both
when they are right and when they are wrong, are
more powerful than is commonly understood. Indeed
the world is ruled by little else. Practical men,
who believe themselves to be quite exempt from
any intellectual influences, are usually the
slaves of some defunct economist. Madmen in
authority, who hear voices in the air, are
distilling their frenzy from some academic
scribbler of a few years back. I am sure that the
power of vested interests is vastly exaggerated
compared with the gradual encroachment of ideas.
Not, indeed, immediately, but after a certain
interval; for in the field of economic and
political philosophy there are not many who are
influenced by new theories after they are
twenty-five or thirty years of age, so that the
ideas which civil servants and politicians and
even agitators apply to current events are not
likely to be the newest. But, soon or late, it is
ideas, not vested interests, which are dangerous
for good or evil. (p. 383)


WHERE YOUR MONEY GOES....

I presume that you do not make your living by
systematically wandering through your town, looking for pay
phones from which you extract coins from the coin return
slots. You will therefore understand me when I say that
money gets spent. That's what money is for: spending. The
amount of currency that stays unused in hoards is minimal.
Mattresses are not the primary resting places of money.
Most money is digital.

The question is: Where does a spender allocate his
expenditures? The largest single component goes to fund
governments: about 42%.

http://mwhodges.home.att.net/mwhodges.htm

Government regulation adds another 14%. This is up
from 4% in 1974.

http://mwhodges.home.att.net/regulation.htm

We pay for this as a component in consumer prices. It's a
benefit only to the extent that regulation provides
benefits. I don't see that the additional 10 percentage
points imposed since 1974 have made me more prosperous.

In the United States, between 12% and 14.5% goes for
debt service and repayment.

http://www.federalreserve.gov/releases/housedebt/default.htm

Most of the remainder goes for present consumption.

About 3.5% goes for saving, and this figure was close
to zero in the 4th quarter of 2001.

Think about this. The government gets its share of
your economic output -- the lion's share -- and you get to
decide what to do with whatever is left over. You will pay
your taxes. You will abide by those regulations. You will
repay those debts. You will pay those insurance premiums.
You will pay those utility bills. You will shop at Wal-
Mart or some higher-price competitor. Your discretionary
income is comparatively small.


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-----------------------


CONSUMER CONFIDENCE IS MISPLACED

What we have seen since 1913 is the build-up of
consumer confidence in the government. In 1913, the year
that the Federal Reserve Act was signed into law, prices
were about 5% of what they are today. See for yourself:
the inflation calculator on the Web site of the U.S. Bureau
of Labor Statistics.

http://www.bls.gov

The income tax extracted almost nothing. Take a look
at Form 1040 in 1913, the first year of the income tax.
Show this to your adult children if you want to let them
know where their inheritance went (along with their college
bills).

http://www.salestax.org/library/1913form1040.html

Notice that there was a personal exemption of $3,000
($55,666 in today's money) in a nation in which average
annual income was under $1,000. A handful of taxpayers
paid 1% to 7% on anything over $3,000.

There was no Social Security or Medicare.

There was almost no regulation of the economy.

Today, we read reports about the rise and fall of
consumer confidence. But consumer confidence or lack
thereof is placed in an economy in which discretionary
spending is so marginal as to be almost irrelevant.

Consumer confidence rises or falls within constraints
so tight that the typical consumer might as well be wearing
a straight jacket. The media's reports on consumer
confidence could easily be imitated in the monthly survey
of inmate opinion in a mental institution."Inmates lost
confidence in July, down seven points since June. Analysts
said this was because of reduced confidence in the Moscow
campaign among one-third of the inmates, who think they're
Napoleon."

Decade after decade, we see the relentless growth of
government. This expansion may be reversed marginally for
very brief periods, but then a recession, a war or both will
put it back on track. Voters call on the government to Do
Something, and what the government does is to increase
spending, increase regulation, and increase promises
(unfunded).

This does not change. It is a universal phenomenon.
Any discussion of consumer confidence takes place only
within the tightening straight jacket of the State. Consumer
confidence? The inmates in this case are residents of the
John Maynard Keynes Hospital for the Incurably Naive.

I am not speaking of the black market. Here,
entrepreneurs provide services for cash. Taxes are not
paid. Regulations are not adhered to. Consumer wealth
therefore increases. This allocation of income does not
appear in official graphs and pie charts.


WHEN CONSUMER CONFIDENCE FALLS

If you thought you might lose your job in three
months, what would you do? Here are a few options:

1. Work longer hours for the
same pay.
2. Accept a pay cut.
3. Take a second, part-time job.
4. Increase your savings rate.
5. Tell your college-age child
to get the degree by exam.
6. Cut your spending on
entertainment.
7. Skip a vacation.
8. Go to night school.

Tell me why they are bad for the economy. If your
answers are

1. Sellers of the services
you're buying now will be
hurt.
2. Your competitors will be
hurt.
3. Less money will flow into the
economy.

then you are wrapped tightly in the Keynesian straight
jacket.

Sellers of services that people don't want to buy
ought to be hurt. That's consumer sovereignty at work.
Competitors should be hurt if you can do the work better.
The same amount of money will flow into the economy; it
will just flow into marginally different channels. It will
be spent.

What this country needs is a huge reduction in
consumer confidence. This might lead to repairmen who show
up on time, trade unions that consent to lower wages,
colleges that reduce their tuition, government clerks who
work faster and professional basketball stars who play for
a mere three million dollars a year.

I'm dreaming, of course. A drastic fall in consumer
confidence would lead to more money being issued by the
Federal Reserve System, more cries for make-work government
boondoggles, higher government deficits"to get America
moving again," longer periods for state unemployment
insurance benefits and Hillary Clinton.

Consumer confidence is meaningful only with respect to
whatever it is that the consumer has confidence in. If he
has confidence in the State as the supplier of safety nets,
then falling consumer confidence in the economy implies
rising consumer confidence in the State. This has been the
situation all over the West since 1932. Only in places
like China and Singapore and Taiwan has consumer confidence
begun to mean confidence in personal responsibility and
increased entrepreneurship. This is why Asia is now
replacing the West in its ability to produce.


CONCLUSION

Imitate the Asians. Work harder, longer and, above
all, cheaper. Or become an employer. Buy capital,
especially capital that is not facing direct competition
from Asians. Become a confident consumer because you have
increased your holdings of productive capital. Become a
confident consumer because you have found a niche market in
which you have an advantage. In short, become a confident
consumer because you have become a competitive producer.

That's the only consumer confidence that matters.
Anything else is a Keynesian illusion.

---------------------------------

Thread gesperrt

 

gesamter Thread:

• Kurzer Blick nach Frankreich (Verbraucher, Staatsschulden): - dottore, 06.08.2003, 09:58
  • ist die 3 erst ruiniert, verschuldet sich`s gänzlich ungeniert (owT) - LOMITAS, 06.08.2003, 10:22
  • Gary North: Verbrauchervertrauen irrelevant - Miesespeter, 06.08.2003, 12:45
    • +++ code is broken +++ panic inevitable +++ bank crash ahead +++ buy gold +++ - Lullaby, 06.08.2003, 15:26
  • Die Verbraucher merken es. Langsam aber sicher - Sascha, 06.08.2003, 13:01