Guest Post: Why Our Consumer-Debt Dependent Economy Is Doomed

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If you understand the difference between the first pair of shoes and the 25th, you understand why America's debt-dependent consumer economy is doomed.

Yesterday I explained Why We're Stuck with a Bubble Economy:

Now that interest rates are near-zero and mortgage rates are rising from historic lows, there is no more juice to be squeezed from low rates. Asset bubbles always burst, destroying collateral and rendering borrowers and lenders alike insolvent.

Without organic demand from rising real income and new households with good-paying jobs and low levels of debt, the consumer-debt based economy stagnates. This has left the economy dependent on serial asset bubbles that create phantom collateral that can support new debt, albeit temporarily.

The other critical dynamic is the marginal utility of additional consumption in a debt-dependent consumer economy. In an economy in which 49% of all residents (156 million people out of a total population of 317 million) receive a direct transfer of cash or cash-equivalent benefit from the central government, and millions of these people also receive cash and/or benefits from state and local governments (49% of Americans Get Government Benefits), poverty is relative rather than absolute for the vast majority of Americans.

The American economy is highly dependent on consumption. Household consumption accounts for about 35% of developing economies' activity--roughly half of America's 70% consumption economy.

As noted yesterday, with the earned income of the lower 90% of wage earners stagnant for four decades, America has enabled consumption by leveraging income and collateral into ever-rising mountains of debt.

The problem with debt, of course, is that it accrues interest, and that paying interest reduces the amount of income left to spend on consumption.

In this way, depending on debt to finance consumption is akin to the snake eating its own tail: at some point, the cost of servicing the debt reduces the income available to be spent on additional consumption to zero. Additional consumption becomes impossible without asset bubbles to temporarily enrich the households that own assets or "helicopter drops" of interest-free cash into household checking accounts.

This is how we have reached the point that a majority of U.S. households live paycheck to paycheck, as earnings are eaten up by essential bills and debt service.

Given that the majority of Americans already enjoy a considerable array of consumer goods and services, the only way to fuel more consumption is to entice consumers into buying more of what they already own or buy a replacement for a perfectly usable good or service. Let's illustrate the concept of marginal utility with shoes.

To those with no shoes at all (a common enough occurrence in the 1930s Great Depression), the utility of one pair of shoes is extremely high: the utility (i.e. the benefits) resulting from owning that one pair of shoes is enormous.

Now consider an aspirational-consumer (i.e. someone striving to look wealthier and more successful than they really are) of the upper-middle class: this consumer might own several dozen pairs of shoes, and his/her problem is finding space for more shoes.

The retailer attempting to persuade this consumer to buy a 25th pair of shoes must overcome the diminishing utility (i.e. marginal utility) of yet another pair of shoes. This is accomplished by offering a "deal you can't pass up" or appealing to the always pressing need to jettison last year's style in favor of this year's "new thing."

Here's the critical point of this dynamic: to the consumer who already owns so much stuff that he has to rent a storage facility to store all the surplus goods, the utility of any additional purchase is low. In practical terms, the utility has declined to the thrill of the initial purchase and the initial wearing/use of the new item. Beyond that, it's just another pair of shoes in the closet.

To the manufacturer/retailer/government dependent on more sales for survival, the value of the first pair of shoes sold and the 25th pair sold are the same. The manufacturer/retailer needs to sell more shoes just to stay in business, and the government living off sales and other consumption-generated taxes also needs more sales.

In an economy in which most people have the essentials of life--i.e. the first pair of shoes with the highest utility--all consumption beyond replacing a hopelessly broken essential is of marginal utility.

An additional $1 of debt adds the same burden to the household whether it is spent on the first pair of shoes or the 25th pair. Taking on debt might make sense for the first pair of shoes, or the first bicycle, but it makes increasingly less sense for each additional pair of shoes or replacement bicycle: the debt piles up but the utility derived from the purchase is increasingly marginal.

The $3,000 I could spend on a replacement bike for the perfectly serviceable bicycle I bought used 15 years ago for $150 is of marginal utility; the better-quality parts and lighter frame, etc.--all the benefits that would flow from spending $3,000 for a "better, more modern" bike are extremely marginal to me, even though I put well over 1,000 miles a year on my bike. All those improvements are too modest to matter. This is the essence of marginal utility.

If you understand the difference between the first pair of shoes and the 25th, and the increasing diversion of income to interest payments that results from debt-based consumption, then you understand why America's debt-dependent consumer economy is doomed.

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jet813's picture

lol you know what they say about opinions - everybody's got one :-)

new game's picture

what should happen is dump the bitch in the river and float the 47 pairs of shoes down the river as a going away ceremony - bye bye bitch. spending problem solved.

LawsofPhysics's picture

Shit, most people don't have wages that cover the cost of living.  $3,000 bikes?  WTF?  Get in shape or dope and they will give you those bikes.  Just ask Lance.

SafelyGraze's picture

I think you misundestood the authors point which is more about how shoe sales are declining because of student debt and credit cards and so forth and that means that nike or reebok and so forth will decline and he is saying that he is shorting these companies and so that is what the author is saying and I am glad to be clearing that up some.

SafelyGraze's picture

hey SG,  I am sorry but you appear that you did not read all the way to the end of what the author was writing about where he was writing that bicycles are not necessarily what you want to upgrade and so he is using that as a way to talk about upscale cars you have seen the lotus haven't you and so the article is about channel stuffing and he is saying to short transportation stocks, you should read more closely

SafelyGraze's picture

you are mistaken because I did read it all the way to the end and maybe you are the one who missed where he was saying about how 

"the thrill of the initial purchase and the initial wearing/use of the new"

and probably that is about getting a new girlfriend you should try it oh yeah now I remember you are in your grandmother's basement and so you wouldn't know about that ha ha so this article is saying that hookers are the new reeboks but you probably wouldn't get that either because you just sit in a chair and play video games

SafelyGraze's picture

enough already!

get a room, you two!

akak's picture

I think this thread is unraveling!

JoBob's picture

Punctuation is helpful if you want anyone to read your comments.

mkhs's picture

If you don't read them, how do you know they lack punctuation?

infinity8's picture

Nobody "worth-a-shit"  is playin' this fucked up game anymore.

Why?  I know you're with me on this. Hang up yer spurs, boys. Zip your wallets. Stop it.

BandGap's picture

Like brussel spouts washed down with stout beer, something has to give.

Zero Point's picture

I read an interesting story once about Walmart's research into underpant buying habits.

They found that most people had a certain number of pairs on average, and did much soul searching before trying to break into that market.

After offering a nice brand at very low prices, they found an interesting thing:

Instead of chipping a percentage off some other retailer, the average number of pairs in people undy drawer went up.

Go figure. Strange old world.

What happens when the drawer gets full though? Sell furniture?

akak's picture

I have about 45 pair of underwear, but only because I hate wasting energy (i.e., hot water), and underwear are the only whites that I have to wash, so I would rather do only one load every 6 weeks rather than one load every week.

SafelyGraze's picture

that is a lot of information to process and add to our database

the people in the big white van parked at the corner 

akak's picture

And just for the record, those idiotic Jockey underwear with the horizontal "kangaroo pouch" fly completely suck, and clearly HAD to have been designed by either a woman or a eunuch.

SafelyGraze's picture

we will pass that information-rich communication along to our handler

btw we spend a lot of days in this van and our motto re: u-wear is

flip 'em
turn 'em
flip 'em again

so we get 4 days of usage out of a single pair

sometimes more if it is a longer assignment 

Boris Alatovkrap's picture

You are transmission of excessive information ("TMI").

Uncle Sugar's picture

Boris - I don't read everything you post, but I immediately up arrow them all.  You are the anti-MDB.

Boris Alatovkrap's picture

Spasibo! You are very thankful!

(What is the "MDB"?)

Miffed Microbiologist's picture

Now Akak, that was unkind. If I were to design underwear for a man he would feel like the biggest cock on the walk. You know who designed that underwear and they aren't known for their impressive scale in that region, hence such a design.


P.S. I enjoyed your subtle, sexual innuendo there. Sexual innuendo is a hard topic to stay on top of. As a humor tool, it stands erect in the English language. While there are no hard and fast rules as to what constitutes sexual innuendo, many people have mass-debated over the ins-and-outs of the topic, and now the general principles at the root of the topic are firm and well-rounded. However, full penetration of the subject requires that the reader take a long, hard look at the target and be a cunning linguist in order to avoid limp phrases and imbibe the phrase with a large handful of meanings. The topic can become hot by attempting to grasp it, and the more one experiments with it, the more interested they become. Also, as the language changes innuendos must change in order to fill the newly created holes and satisfy listeners.

Sorry, I can be an insatiable flirt. ;-)

akak's picture

I would accuse you of stroking your ego and massaging your cunning linguist talents with your fertile and turgid imagination, but your prior intercourse with others in this forum have demonstrated that your spunky nature invariably shoots out and comes to a head regardless of the topic in hand.

Miffed Microbiologist's picture

Touché! One just needs to stimulate me to get my juices flowing in various topics. Sexual innuendo as an art and hobby of mine. An individual needs a certain level of oral skills in order for the fluidic exchange of innuendo to be received properly by the intended recipient. This is not an easy task for most people, especially those so doctrinated in PC tripe or the unimaginative whose lives resemble a rock, so it is only through rigorous repetition of the insertion of sexual innuendo that one can fully master the uplifting effects it can have on vocabulary.

Crap, I've got to stop or I'm sure to get a spanking. It's times like these when I realize my flunking sexual discrimination training was probably justified. ;-)


grid-b-gone's picture

So Wal-Mart and the undie company win, but the electric company, water, detergent, and drier sheets companies lose. 

Squeeze the middle-class and this is what you get - thinkers, and thinkers don't expand GDP like the good old days of habitual consumerism.

F22's picture

Dude....go commando

dick cheneys ghost's picture

I haven't worn white underwear since the Reagan Administration

akak's picture

That's a good point, actually --- why don't they make yellowish-brown underwear, and save us all a lot of stress?

cbxer55's picture

I just wear black underwear. No dis-coloration problems. Can wear them for multiple days, and no one would no the difference. ;-)

Miffed Microbiologist's picture


Mr Miffed would have truly appreciated that suggestion. A few years back I was ill with stomach flu and he tried to do a laundry unsupervised ( that man MUST have clean underwear, some kind of genital pride thing) He ran a hot wash with his white jockeys but added a few of my red cotton bikini panties just to be efficient. Yup, you guessed it. Thirty pairs of pink jockeys. This was so hysterical. Being quite the he man he was loathe to wear pink underwear but he is also very frugal so tossing out good underwear was anathema. I called it his Jewish Dilemma ( free ham). He was so distraught I came to his rescue and managed to bleach them sufficiently to where he viewed them as wearable. He has great respect for me as a laundress as well as a few other things. ;-)


Seer's picture

Well, That explains where that smell is coming from!

Imagine the energy we could save if we were to solve the self-cleaning clothes puzzle!

BTW - You don't need to use hot water unless you've got greasy stuff: this was made very clear to me by the owner of a laundry-mat that I used to use (it was one of the highest rated laundry-mats around).  Bacteria isn't going to be killed by the temps (and duration of wash) of typical water heater temps: soaps with disinfectants or bleach (ugh; I like H2O2- that's how I treat my well water) can do that, or... sun light (which also helps whiten).

grid-b-gone's picture

The movement of U.S. jobs offshore was a short-term corporate bonus. Corporate execs may have honestly believed that consumers from Mexico and China would pick up the slack of an American middle-class with stagnating wages, but that has not been the case.

The strategy of eroding the consumer base of an economy representing 25% of the world's wealth comes down to this:

Cost-cutting decisions have not resulted in new, affluent customers worldwide, but rather only destroyed the richest customer base that was essential to revenue and margin growth. Now that prime U.S. demographic group is more dependent than ever on government largess, and more likely to vote for promises that keep the gravy train chugging along its faux prosperity tracks.    

Freddie's picture

What is this "American middle-class" you speak of?

Seer's picture

It was always a losing game.  Eventually growth wouldn't/couldn't be there.  I suspect that They know/knew this.

"Middle class" is a product of excess growth.  That's the reality.

Automation plays a HUGE role in cost-cutting.  Robots don't seem to get out and shop much... clearly, the "model" had/has a flaw.

new game's picture

seer, someone in upper management figured it out, but did he/they give a shit-fuck no, cause it is always about taking what one can get and worry about tomarrow when it arrives.

key words; monsanto, gmo, farmland, water table...

Seer's picture

Maybe it's me, that I tend to view things in a more neutral perspective (IMO that keeps biases from blocking important information), but I don't see it so much as some diabolical plot so much as it is being about the big rat race.  The System itself demands constant growth, and, well, any edge that can be had is an edge over a competitor.  We can blame it on the shareholders, but, I suspect, many here have been one from time to time (and, if one is a day-trader then it's for a very short time), we've helped support this very system.

In a nutshell: human hubris led us to feel god-like in our ability to create growth, resulting on mass cognitive dissonance; the conclusion will be what it always is- collapse; I'm not seeing how we can reprogram our genetic engineering to not do other than "load up during good times and try to hold on during the bad times." (the ONLY way is if we were to understand growth itself, but then there's the problem of a "solution")


grid          Well I don't know about the mexicans but too funny that the Chinese and Indian people have spent their new increase in income on gold, shoes not so much.

Seer's picture

I suspect that the numbers of Chinese and Indians buying gold isn't as large as your comment might suggest.  There are 750 million people in India living on $0.50/day; I'm sure that there's a similar situation in China.

Crawdaddy's picture

Dear Guest Post - Stop it please. You are harshing my mellow.

DC Snuge Licker
ps and my party bro - banky wanky douchebag from NY

F22's picture

How about the marginal utility of that 25th Gold American Eagle...or the 250th....

Bobbyrib's picture

Same as the marginal utility of saving?

Stuck on Zero's picture

This is depressing.  I think I'll borrow $50K and go buy myself a new Mercedes.  Wouldn't the President be happy that I'm helping the economy?


pupdog1's picture

As can be illustrated using the famous Imelda curve from banana republic economics, the two-thousandth pair of shoes has utility equal to the first pair.

Using the recently developed Moochelle curve, the four-thousandth pair is equal to the first, but only when purchased with taxpayer funds that were earmarked for orphans and pediatric medical research.


Seer's picture

As someone married to a Filipina I can vouche for the shoe thing...  To be fair, however, my wife isn't all that excessive (lots of boots- we're on a farm!), and, while growing up in the Filippines she usually only ever had ONE pair of shoes.  Lots of exercise kicking shoes around... constant tirpping hazard! (not endowed with shoe closets)

Diogenes's picture

"If you understand the difference between the first pair of shoes and the 25th, and the increasing diversion of income to interest payments that results from debt-based consumption, then you understand why America's debt-dependent consumer economy is doomed."

What are you a commie?

Enough Already's picture

For the past 8 years I have purchased most of my "stuff" from the Value Village. Most recently, a pair of Michael Kors jeans. $6.99.From Michael Kors, directly, probably $149.99. 

This is the future. 


In the USofA we already have Too Much Stuff. Made in China. And in the USofA there are Value Villages and Goodwills, everywhere. 

Yes, there are poor people. But they are taught to be poor. 

Nothing will change until the economy collapses. 

Seer's picture

"Yes, there are poor people. But they are taught to be poor."


Given the reality/fact that upward mobility is mostly BS (higher rates in those socialist EU countries for chisst sakes!) I'd have to disagree that this is mostly about "choice."

"Nothing will change until the economy collapses."

Nothing will change until something changes.  Um, like, duh! (some sarc)  If you think that you'll be able to calmly stroll down to that Vallue Village after the economy collapses then I've got news for you...

cossack55's picture

WTF is a Michael Kors?  The only way I'm paying $150 for a pair of jeans is if the zipper is 24Ct gold