Greenspan Comments

[bpj]

http://www.elliottwave.com/club/newsmax.htm

If they don't have any savings, and their debt nearly matches their income, WHERE do consumers keep getting the money to consume? Alan Greenspan heard the question, and gives a mind-boggling answer....

I wish I had a dollar for each time over the past two years that I've heard someone say, "Consumer spending has kept the economy afloat." I could probably pay off my mortgage.

And while conventional wisdom that's repeated with mind-numbing frequency is rarely true, this is an exception. Consumer spending very likely HAS stimulated the economy for the past two years.

Still, here's a question that has bugged me: Where are consumers getting the money? I ask this for a couple of simple reasons.

First, personal saving has fallen to measly levels ? around 3% of disposable income during the past four years. This is less than half the percentage from a decade ago, in fact the lowest level in nearly 70 years.

Second, consumer debt has reached 90% of personal income (double the percentage since the 1950s). In case you're into big numbers that's a total consumer debt of $1.733 trillion, not including mortgages or equity lines of credit.

So: If they don't have any savings, and their debt nearly matches their income, WHERE do consumers keep getting the money to consume?

The answer came on November 13, in public remarks from someone who has pretty reliable numbers, and who (so I've read) spends much of his time studying those numbers.

"According to survey data, roughly half of equity extractions are allocated to the combination of personal consumption expenditures and outlays on home modernization .... the extraction of equity from homes has been a significant support to consumption during a period when other asset prices were declining sharply. Were it not for this phenomenon, economic activity would have been notably weaker in the wake of the decline in the value of household financial assets."

So THAT'S what's up with the tens of millions of mortgage refinancings we keep hearing about. Mr. & Mrs. Homeowner are cashing out big-time equity. (Funny how debt is called "cashing out," isn't it?) In turn they become Mr. & Mrs. Consumer; add a new room to the house; then fill the new room full of new stuff from the mall.

This is all for the good, mind you, at least according to the person who made the above remark ? "a powerful stabilizing force" were his words. Refinancing is good; cashing out is better; new stuff from the mall is better still. And as you may have figured out from the prose style, the gentleman who said all this (and more) is Alan Greenspan in his testimony to Congress.

This ends us up where I began, and then some. Consumer spending is good because it "keeps the economy afloat," so rising levels of debt must be good too.

Maybe so. Consumers have borrowed & borrowed and spent & spent for years. It's just that in the same month that debt increased (September), personal consumption declined for the first time in 10 months.

And while this contradiction in the monthly data is worth watching, another one looms much larger. Record levels of consumer spending in recent years have not produced the effect that economics textbooks say should follow: Inflation. If anything, signs of a mild DEFLATION are everywhere. And if consumer spending finally does exhaust itself, "mild" will not be the right word for the deflation that follows.

Is there a limit to the refinancings, the cashing out, the number of new SUVs packed with stuff from the mall? What happens if consumers reach that limit?


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