by Guest Authors Lance Roberts of Streettalk Live
Consumers Gone Wild! I have this image in my head of shoppers running about frantically over the last quarter shelling out dollars at everything that isn’t nailed down to the floor. That was the general consensus Friday after the GDP report came out showing a lift from 1.3% to 2.5% primarily on the back of the consumer, as shown in the chart. However, the real question is where did the money come from?
Over the past 10 years Chinese consumption has declined, investment increased and real interest rates have declined. And interest rate increases have pushed inflation inflation higher.
Both modeling and the historical record indicate that austerity in the midst of a balance sheet recession leads to increased deficits. The historical analogy frequently raised by Richard Koo, who argues that the attempt by the Japanese government in 1997 to reduce budget deficits in the midst of a balance-sheet recession resulted in larger deficits, not smaller ones. We may be already seeing the same thing in the UK, as deficits there are now growing in the aftermath of austerity measures undertaken late last year.
If high-consumers (low savers) become as virtuous as low-consumers (high savers), that just means that global demand will decline, and with it, global unemployment will rise. In that case global savings won’t go up. They will go down, since rising unemployment causes income to decline faster than consumption.