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Revisited: Where is the Money Coming From to Fund Spending
From The Daily Capitalist
When I make a mistake I will admit it.
In my analysis of consumer spending I asserted that the sources of increases in spending were (1) a draw-down of savings and (2) the redirection of defaulted mortgage payments to spending. I was half-right which another way of saying I was half-wrong.
I missed one the basic laws of economics, Bastiat's "Broken Window Fallacy." You know, the kid breaks the cobbler's window, the cobbler pays for a new window and everyone thinks that the cobbler's spending helped the economy because the glazier had work. The fallacy is that the cobbler was going to buy new clothes from the tailor and now can't afford it. So the cobbler still has a window, is out the cost of the window repair and the new clothes. It's a net loss to the economy.
The lesson is that you always need to look at the unseen as well as the seen. I missed that point entirely when I claimed that people spending their mortgage payments on consumer goods. Someone loses here and that is the lender. I forgot to ask what the lender was going to do with the money. Thanks to Caroline Baum, the very excellent writer for Bloomberg to point out the obvious. (See, "Honey, I Lost the House. Now It’s Time to Party.")
Mea culpa and apologies. Unfortunately many, many people made the same mistake (Mark Zandi, David Rosenberg among others).
So, back to the numbers.
Analysis of Sales Report
March retail sales were up 1.6% over February, and +7.6% from a year earlier, not adjusted for inflation. The annual nominal rise was the largest since July 2005. Eleven of 13 major categories showed increases in sales.
Here are the major components of the Census Department report representing 77.4% of total sales:
| % Total Sales (Weighted) | Category | % Change |
|---|---|---|
| 19% | Motor vehicles | +6.7% |
| 13.5% | Food and beverage | +0.2% |
| 13.5% | Department stores and big box retailers | +0.6% |
| 10.8% | Restaurants and bars | +0.3% |
| 9.2% | Gasoline | -0.4% |
| 6.6% | Building and garden | +3.1% |
| 6.1% | Health and personal care | +0.2% |
| 4.8% | Apparel | +2.3% |
First, it is important to note that sales have trended upward since reaching bottom in December, 2008. Here is a wonderful chart from Vix and More putting the decline and recovery of retail sales in perspective as of (as of February 15, 2010; these numbers are not adjusted for inflation):
Here is a chart from Seeking Alpha (Wildebeest) that shows retail sales adjusted for inflation (solid line is 12 month moving average):
This trend is occurring despite high unemployment, declining wages, and other negative factors mentioned in my original article. Nominal discretionary spending increased for the first MoM period in 28 consecutive months.
Without autos, building and garden materials, and apparel, all discretionary spending, retail sales would have been relatively flat especially if one considers the ±0.5% margin of error. Adjusted for inflation real discretionary retail sales were a -1.18% YoY.
What Drove Discretionary Sales?
What drove those discretionary items which contributed the most to the 1.6% increase and where did the money come from?
Auto sales were driven by deals. Discounts, interest-free financing, the impact of Toyota's deals to keep market share, and other incentives were the main factors. People need new cars and if you consider that 83% of the population have jobs, that Cash for Clunkers (ended August, 2009) ate into future sales, that people have been putting off buying a new car because of economic uncertainty, the MoM and YoY gains represented pent-up demand.
Securitized nonrevolving consumer credit, which finances auto sales, has actually increased in the last few months which shows that buyers are relying on auto company and bank financing to purchase the hot deals. This is the only category of consumer credit that increased. This would not impact savings.
I don't expect it to represent a long-term trend.
Building and garden materials is a response to a pick-up in home sales. While low prices are the primary driver of this market, the market has been artificially stimulated by the Cash for Condos program, a tax credit that ends on April 30. Existing home sales surged 6.4% in March MoM. I expect home sales to decline after April. Other factors, such as increased foreclosures, tightening financing standards (FHA), and rising interest rates will act as a natural brake on sales. I expect sales to remain flat. This would cause home improvement related sales to decline.
Apparel sales did well. The reasons given are that better weather and an early Easter holiday boosted sales. I think that is accurate.
There may be some immediate effect on spending as borrowers spend their mortgage money, but the obvious impact is that it will have a negative effect on the economy in the medium to long-term. It doesn't take much time for people to spend their "free" money, but it takes longer for the shortages to impact the lenders, almost all large financial institutions or RMBSs.
Status of Economic Recovery
It is apparent that the economy is starting to rebound. There are several reasons for it. One is that, despite the fact that the long-term impact is negative, there is a lot of fiscal stimulus working its way through the economy. I believe this will have a short-term effect only and will wear off when the money is spent.
I believe there are too many headwinds in the way of a recovery that will impact the economy some time in H2. I have written about this many times and referred to some of these factors in the original version of this article.
There is another factor which I have also written about. That is that some of this recovery is real. The U.S. economy has a remarkable ability to correct its mistakes after a bust, reallocate capital to profitable ventures, and grow again. I cannot discount this fact even though I believe the data doesn't quite support that conclusion.
I don't think that any Austrian theory economist could honestly come to any conclusion on that because it is too difficult to know if "real" capital is sufficient to support new growth. And the reason is that the government is doing so many things to thwart and delay a recovery by supporting companies and industries that need to fail.
Primary among those government policies that delay a recovery is allowing banks to stay alive when they should fail.This is the cause of the credit freeze as credit and money supply continues to decline. In the real estate crash of the late 1980s, more than 2,000 banks, and 1,589 S&Ls, were closed, the Resolution Trust Corporation sold assets wholesale. The economy went into recession in 1990 and started recovering after 8 months. In other words, bad assets were quickly disposed of, banks were put out of business, and credit flowed again. This is not happening this time.
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I wonder how many people read Bastiat's works and not those propaganda excerpts. Who cares?
What is that, helping the economy? This is a travesty of Bastiat's ideas as he focused on accumulation, not helping the economy for whatever this means.
And what? The guy is providing himself with his own activity, depriving another from getting it. So what? It is part of the competition process.
Once again, too big to fail is a status acquired through competition. It has nothing to do with the government, the FED or anything.
Density of competition getting low is generally an indicator of too big to fail. When a minority of players stands for more than the aggregated rest of players, they are in too big to fail status.
If capitalism is hinged around competition, I wonder how accounting too big to fail status is not letting capitalism work.
Not holding my breath to get an answer. Last time, I asked whether Keynesians would have a ground if situation is bettered, not gotten an answer.
Same economist shallow speech,"my religion says this or that", hiding the primary factors behind the scene.
The answer is in the BEA's personal income report.
PCE is up due to transfer payments and a reduction in tax collections.
Inflation adjusted, economically earned income is at Q2 2005 levels.
The government is borrowing to fuel spending.
The broken window theory works to the degree that the economist sees the enemy of growth as savings. (they have the Orwellian technique of comparing savings to gluttony, a savings glut)..
party A has been saving his money for a rainy day, government B seeds the clouds. (Party A is an insurance company? Party B is hurricane Katrina?)
As a matter of economics the housing asset bubble has been a raid on equity, all performed under the illusion of increasing the nominal value of their homes, people have had their savings stripped away. Likewise people on fixed incomes, stingy guts, misers and the like, (anybody who doesn't have half their annual GDP already in credit card debt) are seeing their money dragged out of those dustbins and put to work (and put into penury for their sins).
The raid on equity is not over. Now we have a lot of homeowners, who have a lot of sweat equity tied up in their mortgage, those with lets say half or more paid off. Now think about it, property values fall, that equity becomes a greater percentage of the homes value. You're thinking yes, but the value of the home goes down, the value of the equity goes down as well. Not true for a couple reasons, in asset deflation, money is actually worth more. Housing values wouldn't be falling if the supply of available credit wasn't drying up. Secondly the value of that equity will return to the historic norms, eventually. For the same reasons the Fed doesn't want consumers buying gold, (gold is the personfication of savings gluttony, that form of equity which contributes the least to the economy). And we know what they do in order to keep people from hoarding gold, or any other store of intrinisic value.
The Fed/UST will go after these savings, people who have mortgages and pay them off, and have equity in their homes, if they have to carpetbomb huge residential neighborhoods, and not the ones you'd think, but the ones which are sitting on cash reserves. Their policy requires zero change in their morality or thinking, just a continuation of their policies already in place.
not sure I get it....won't they go after equity like 401k/IRA money first? Under the guise of helping the little guy with their retirement needs of course. But how do they after those that paid off their houses?
you need to have a graph tht compares the spending with the price of the stocks. how far above the incrased spending are the stocks.
what is the pe of the sector? if they are at a pe of (28) good short. if they are at 15 no.
FYI all on taxes going up in 2011...http://www.cnbc.com/id/36736921
Moral to the children: Start a bank. Buy a bank. Get a bank any which way you can.
The only bet in the world that you win no matter what.
Yes, buy a bank, mis-manage, loot it.
Then get in line for free/low cost money and bailouts.....
2- 3 trillion of new fiat from the fed . keeps the fires burning ,, albeit higher prices.
the dough of course is fake , but go tell that to the pig with lipstick ..
We will not have to wait that long to uncover the reality of the situation. There will be a lot of activity in the next 6 months. My first focus is to look at tax revenues for April. After this it is just a matter of time until the states ask for a fed bailout. But before this, Greece will become an IMF debt slave, and hand over their most important infrustructure assets, like railroads, to some IMF priviteer. Bonds will be juiced just a bit, to stall the inbred inability to control costs.
And then we move on to the next sovereign debt IMF bailout buddy through leveraged impoverishment. From the US side though, this is a bit of a pink elephant. Because we will be watching the staggering amount of debt going up for sale. If for some reason equities represent reality, Fanny and Freddie will be asking for more money before the end of Q2.
Add to this the FEDs last gasp at inflating house prices through MBS purchases, and the end of the home buyer tax credit. What will the FED do? Nothing. Nothing until the Treasury can no longer have positive cash flow. Once this happens say goodby to US capital. So what will the administration be doing? Making sure the military has enough money to drop bombs, while the states decimate the ranks of our teachers.
Mark Beck
Thanks so much for the thoughtful post and responses.
I'd guess most of the spending is coming from people spending through their nest eggs, whether IRA, QP, or brokerage - whether their own hard-earned cash or inheritance.
So long as there's enough cushion for people to readjust their spending habits to the new realities, they'll stay afloat. Hopefully, people get jobs before they run out of savings. Right now, personal savings rates are big time negative. I'd say it all rests on whether employment begins to grow (jobs, small biz startups, under the table, whatever). If people begin to spend their earnings, we will have a sustainable recovery.
Perhaps the biggest losers in this scenario, assuming employment recovers, will be in the long run when everyone spent all their own and their parents' money... so the much anticipated giant wealth transfer between generations never happens because it's all been spent. But, then again, if that just makes the future generations hungry and motivated, it could be a good thing.
It doesnt seem unreasonable to think that tax refunds might be partly responisble for the increase in (consumer) spending.
"fifteen times (?) equals -495" wtf? enter the solution with digits? this must be that new math everyone keeps talking about.
+1000
So -- mark to market, already! The mortgage money is GONE, it has been spent on retail. We will not see a recovery in housing for decades. Banks need to disgorge their nonperforming assets and FINALLY recognize losses, it's the only way to clean the system. Well, I guess they could sell them back to us via FHA, Fannie and Freddie. And now they're going to be forced to buy the long term Treasuries, and be ineligible for FDIC backing if they play with the funny stuff again. Punchbowl is empty, party over.
Some eye-opening survey results from (can you believe it?) Fannie Mae: Mugged by Reality, Americans Rethink Homeownership
http://industry.bnet.com/financial-services/10008232/fannie-mae-shows-theres-no-going-home/
http://www.fanniemae.com/media/pdf/2010/National-Housing-Survey-040610.pdf
Sorry, but accountants still have jobs, the IRS still has its rules, and all these missed payments and strategic defaults are being recorded. The missed payments should show up in mailboxes as 1099Cs because the debts have not been written off in a foreclosure or formal restructuring of the mortgage. Let's see what happens when all these Bravehearts try to stiff the IRS -- LOL.
No, Not really. If they send out 1099Cs they are acknowledging a loss. They can't do that if they are carring it on their books as a asset and haven't set aside a reserve or recorded a loss.
Correct. Losses on foreclosures and many short sales have not incurred 1099C's from the banks. Accounts are still "open" and counted as assets regardless of transfer of title.
Won't end up a pretty picture.
Read the IRS code on this. Congress excluded foreclosures, short sales and other official restructuring through 2012. It did not exclude deadbeats and strategic defaulters. The federal government is coming up on a cash flow crisis, do you think the IRS is going to ignore tens of billions of dollars in potential tax revenue collections because a few large banks won't follow a simple rule and send out 1099s? Unlike the FDIC and SEC, the IRS knows how to get people's attention.
The broken window will either be boarded up or have bars put in it's place. Then the crack whores will move in and redecorate just before the house burns down killing them all. Along comes a bloated plutocrat who makes a killing on the dead crack whore insurance policies he has been tracking via Social Security. The torch he hired will get a cushy job as a highly paid lobbyist for the fire protection industry. The torch and the plutocrat now have money to spend.
No harm done. Everyone is happy.
I think the broken window fallacy is not a good analogy here for one not paying his mortgage. With the broken window either the glazier or the tailor receives the money that they will spend in the real economy. Net change zero. Withe bank it is different. Giving the money to the bank gives them more funds to leverage speculation in Wall Street casino. This is net destructive to the economy. On the other hand if borrower stiffs the band and spends it on goods or services it goes directly into aggregate demand. Net change positive.
I still maintain that people aren't paying their mortgages due to job loss and are most certainly not living it up on some kind of contest winning shopping spree..
If the SEC is full of porn watching finance experts, I can be easily convinced that every govt data point is a work of fiction...
As to economic losses.. What else could have bee done with the trillions Obunghole and his minions are spending ?.
You are not implying that profligate spending only started in the last 18 months are you? Surely you can take it back to its source -- say around 1913.
Nah... If I were to focus purely on govt spending I guess the turning point is the beloved Reagan.. Recall Dickhead Cheneys remarks on deficits ?.. "deficits don't matter". These sacks of shit are all pers from the same paleozolic era.. Include Greenspan.
1913.. Sure. However there are other milestones along the way. JFK's EO. Nixon's betrayal of the gold standard. We could discuss all day....
We could talk about Clinton and Nafta. Bush and his wars, his negligence, his give away of the middle class to China. Now Obunghole and his destiny to repeat all the mistakes of the past because he thinks he is the smartest guy in the room. If his math skills were as good as his oratory... He'd think differently.
For my kooky friends... Yes, the Jews are plainly visible, from Kissinger to soros, Greenspan to Bernanke, IMF, sec, FDIC, FBI, rubin to rahm, perle to orzag to Gensler and summers, media Zuker, Weinsteins to Bloomberg, leiberman, cantor, Specter.... But ... Who is pulling their strings and what is their real purpose ?.
What is the purpose
Purpose? To feather their own nests, of course. That involves plucking the common folk to do it. Do all the puns/jokes on "plucking" that become apparent...
What good is feathering a nest when you have fouled the land around you ?.
There are mansions amidst misery all around the world. Enclaves of power and insulated kingdoms are not uncommon.
Paul Jackson wrote,
"Because the consequences of missing a mortgage payment are so far in the future, thanks to the multitude of government assistance programs, consumers are behaving as if they've just been handed a free lunch."
Struck me that this is simply pulling yet more demand forward. One day, perhaps FAR into the future, these consumers would ideally have paid off their mortgages and would indeed then be free to spend this money on retail crap.
They're just doing it early.
Great article
Missed mortgage payments are to the economy what depreciation expenses are to the cash flow statement.
Since mortgage payments are going to retailers we might be looking at one hell of a consumer rebound. That will put a bid under commercial real estate. The irony is that the consumer rebound is based on a type of HELOC; the CC liabilities are supported by the unrecognized losses on mortgages. Retailers rebound to the extent regional banks suffer. We can kiss any sort of middle tier credit growth good bye.
What if these retail sales reports can be manipulated as easily as the unemployment reports? We're assuming they are reporting the truth. I'd reserve judgement until we see confirmation in company earnings reports.
I'm telling all my friends to stop paying their mortgages. No American should have to pay for shelter.We have universal health care. How about universal shelter?
Carl Marks, join the Army , get both plus travel. Free target practice and many more benefits. Can 59 year olds still enlist?
Robbing a bank and wait to be arrested is another path for R+Board. Includes medical and other amenities.
Both choices beat living in a tent amongs hundreds of other tents.
Visited Zero Hedge enuff to recognize politics at play on this site. I do not feel free to speak openly, candidly. Feelings and egos are easily bruised, some subjects discussed openly and honestly incur insults and shape attitudes. Merely mentioning gold or jew seems to really bring the junks . Ill will is not something i wish to encourage.
Thought create and have power. Think well friends. Water wings, CD, Chumbawamba, Geopol, MsCreant, 777 , Orly ..and a few more ..I thank you all for the rapid education
Mr Beale i wish you a full recovery in every way.
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"I missed that point entirely when I claimed that people spending their mortgage payments on consumer goods. Someone loses here and that is the lender. I forgot to ask what the lender was going to do with the money."
You are missing a HUGE point here. The money that the bank won't get is not yet being recorded.
That is, for every 100 borrowers not paying their mortgage, the bank is assuming 50 will eventually cure. Even if only 10 actually do.
In the meantime, the bank is borrowing money at zero percent and earning 3.75% on USTs.
So those missed mortgage payments ARE going to fund spending. Where is the money coming from? It is being created out of thin air, as usual, through money printing and deficit spending.
Eventually the bank will recognize the loss, but only after they have generated sufficient profits from their carry trade to offset the loss.
It is a complete fallacy to suggest that every dollar "saved" by a mortgage holder by not paying is coming out of the bank's pocket immediately. It is not.
Not to mention a vast majority of the missed payments are on mortgages owned by Fannie and Freddie. Where is the money coming from to fund those missed payments? You got it, government deficits.
Missed mortgage payments ARE fiscal stimulus.
Caroline Baum's article is DEAD WRONG. Ultimately the taxpayer WILL pay for the vast majority of missed mortgage payments, either through the bank's generating income via the carry trade on USTs, or Fannie and Freddie bailouts.
Since the banks already lent the money out, it is still a loss. Because banks can make money some other way doesn't mitigate the loss. They would have made more had they received the payments. If the taxpayers do pay for the loss to the lender, then there is still a loss because we taxpayers are relieved of the money we were going to spend to reimburse someone else who has already lost. We can't forget that the window is broken. It's like saying why don't we destroy all buildings and create a boom.
That's logical and that's why it doesn't work. The banks never felt the loss because the the govt said it was ok to pretend it didn't happen and the govt give them a no risk way to repair the loss that never happened so in the event the the bank piles up enough profit and slips houses out like accidental farts into the market, no one will ever be the wiser.
Besides, if you are now allowed to monetize bad debt with that sequence, when they do pop that fart , there will be some cash to add for liquidity. So cash flow wise it's a net positive. They just have to wait till that carry trade covers it all up so accounting profit which is just a concept anyway, will show no net loss while cash flow improves once they monetize the collateral for the bad debt for operations that they monetized for the carry trade which helped the income statement and balance sheet. It could be called One sheet at a time, triple entry , time based, faith based accounting.
We all know how these accounting systems end, but every 10 years some new group of smart guys figures out a new fool proof way to make the GAAP gods turn the other cheek that they just have to try. The twist on this one is we never had the govt so actively involved with a new acct system, which is why Bill Black was only asked two questions during the Lehman hearing. Did you shave your beard? was one of them I think, I can't remember the other one.
But they got to figure out a way to stop the 300,000 homes a month that are building up the fart inventory. If they can't that's when they won't be silent and truly will be deadly.
yeah why don't we destroy the United F**cking States of America and start all over again. Do you suppose Wall Street is betting on the Tea Party, or hedging their positions with Obama, or the other way around? Seriously Wall Street is betting that they will survive the revolution, and if they dont? Well what the hell, if the asteroid hits earth, what is your short portfolio worth?
The cobbler's cost basis for his house has increased, without any corresponding increase of value. Value has been lost.
Instead of the cobbler's cash going directly to the haberdasher, it's had to pass through the glazier first. This seems inefficient and may also represent a loss of value.
This is a great post. Honesty is a rare thing these days. Right or wrong, I respect a man who looks critically at his own work.
but now the glazier can buy the new clothes.
Only two things can be lost:
1) Time;
2) Energy.
What was lost was the energy and time put into making the original glass.
I think what you miss about the Bastiat story is that the extreme example is that it would be best to bulldoze everything in sight and build new. That is absurd, of course. The total loss would be just that; nobody gains.
But now the glazier has money and he can go to the tailor, where as before the window was broken he couldn't. So was there really a net loss to the economy? The only harm I see is the glazier is now well dressed and the cobbler is not. Zero sum. Am I missing something?
That would depend on where the glazier draws most of his income: from repairs or from new construction.
In a good economy the glazier should doing well on the latter and not dependent on the former.
It is said that Greed then folds her robes in a huge pocket and gathers up everything of value left behind. With her wide mouth open and gaping, Greed admires the trinkets as she sifts through die sand for broken bits of gold. When her pockets are filled, she stuff is money bags and purses with her treasure. As she works, the bag is held in her left hand while with her right she combs the field with fingers like rakes. This last monster is followed by her allied fiends, Care, Hunger, Fear, Anxiety, Perjury, Dread, Fraud, Fabrication, Sleeplessness and Sordidness. Among them are the crimes born and nurtured by Greed so that the brood grows strong on its mother's black Like ravenous wolves, her young prowl across the field. If a soldier sees his brother wearing a jewelled helmet, he will not stop at murder to get it. If a son finds his father dead after battle, he stifles his grief and strips the corpse of its wealth. Civil war permits brother to steal from brother. Pride of Possession, who is never sated, spares no one; Gluttony robs even his own, children.
These follow the advent of Greed. Such a slaughter is set loose in the world that droves of living things are destroyed. One man blind and with his eyes pried from the pits of his skull is left to wander by night over every hurdle without a staff to help. She catches another with his eyes wide open by showing a grand dung. When he reaches for it, her sword catches him; he sighs as it finds his heart. Many men, like pigs, are driven to furnaces where gold is being burned out of its rock. Each man, though it dooms him to death by fire, stretches his hand into the glowing chamber hoping to find gold. The entire human race is seized by Greed; all men are destroyed before mortality can be saved. Of all the vices there is none more frightening: Greed wraps the lives of men in calamities that they only escape when they are thrown to Hell's fire. She even dies - it is too much, even I can scarcely believe such a horror - to tempt the priests whose pure lives are spent in the service of the Lord. They are the leaders who stand in the battle lines doing battle for the virtues and blowing horns to encourage and guide those who follow their steps. Greed will have attacked them and destroyed their bodies if Reason, the guardian of the tribe of Levi, has not covered her foster sons with her great shield and saved all of them from the deadly rush of Greed. With the assistance of Reason, the priests are saved and remain strong and uninjured in the battle. Only a few of them feel the lance of Greed and they are only scratched. Most infamous pestilence that Greed is, she is astounded to see her spears turned away so neatly from her enemies' throats.
A. P. Clemens
Thankyou, lilimarlene1 Poetic truth, and explains the difference between those who follow the Lord, and the multitudes who do not.
Ummm, OK, I guess.
But ... isn't greed part of human nature?
Pride, envy, glottony, lust, anger, sloth are a part of human nature. Especially, it would seem, at Goldman. But not just there. It's gaining on all of us.
The squid is just an allegory for something much more ancient.
It has a chink in its armour. And that is breached by:
The Seven Contrary Virtues:
humility, kindness, abstinence, chastity, patience, liberality, diligence.
No doubt, in short supply in squidland.
Lili:
Then the best system is capitalism because it is the only one that (should) lets losing companies fail. If only we had capitalism operating during this cycle. The problem with the economy wasn't any of the sins or lack of virtues. Those things always exist with economic actors. What was different this time? It wasn't greed. It was the creator of all business cycles (not Zeus): the Fed.
I sure hope you look like Garbo.
If the cobbler can't afford to replace the broken window, and instead prints his own money, then loans it to himself at 0% interest to pay for the window replacement, how much is the net loss to the economy?
In that case, there is no net loss to the economy, as long as everyone in the village can make leveraged bets on whether the cobbler gets the window repaired before he goes Chapter 7.