The Fed can print but it can’t force banks to lend or consumers to spend. That is one of the battles the Fed faces in its efforts to reflate.

Frugality is now etched in stone as Americans Plan to Limit Spending on Recovery Concern.

Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

Respondents were divided over whether the economy will get better or stay the same in the next six months; only 1 in 6 said things will get worse. More than 40 percent of those surveyed said they feel less financially secure than they did when President Barack Obama took office in January, outnumbering 35 percent who said they feel more secure.

“People I never thought would lose their jobs have lost their jobs,” said Angela Payton, 42, a university publications editor in Florence, South Carolina. She kept her children out of summer camp, stopped buying organic milk and plans to curtail the party for her daughter’s 6th birthday in November.

In the poll, conducted Sept. 10-14, 40 percent of those questioned said they have experienced one or more problems from the banking crisis. In the most-often cited repercussions, 27 percent said their credit-card interest rates have risen dramatically and 15 percent report that they couldn’t get a home-equity, car, or other kind of consumer loan.

By 62-34 percent, Americans said high unemployment is a greater danger than inflation over the next two years.

Huge Psychological Differential

Note the psychological factors in play

  • Only 1 in 6 said things will get worse.
  • Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less.

Total Consumer Credit Plunges

click on chart for sharper image

A collapse in consumer credit of this magnitude has not occurred since WWII. Even still, in the face of only 1 of 6 who think things will get worse, nearly 33% of consumers plan on spending less.

For additional charts on consumer credit, please see US Consumer Credit Shows Steepest Contraction in Over 5 Decades.

Deflationary Hurricanes in US and UK

Flashback June 30, 2008

Please consider a snip from Deflationary Hurricanes to Hit U.S. and U.K.

Implications of Peak Credit

When it comes to the collapse in credit, the above Central Banks are powerless to do a thing about it. This is to be expected now that we are on the backside of Peak Credit.

The saturation point has been reached. It took decades but we have finally arrived. None of the financial engineering jobs that fueled this credit boom will ever be needed again. SIVs, Conduits, Toggle Bonds, Covenant Lite loans are all dead for years, more likely decades to come. Add to that liar loans, Pay Option Arms, insane leverage, and numerous other ridiculous lending arrangements. And if those things are not coming back, we do not need Wall Street shills to securitize that garbage and pitch it to unsuspecting suckers.

In addition to financial engineering jobs, there was a boom in commercial real estate, home depots, remodeling companies, landscaping, furniture, appliances, plumbing, heating, air conditioning, restaurants, and even things like grass seed.

There is no source of jobs to replace what has been lost and what will be lost. Discretionary spending is dead. Boomers about to retire are about to get religion. Sadly, it’s too late. Savings they thought they had in their house, have now vanished into thin air. It was all a mirage in the first place, but mountains of credit has been extended on the basis of that mirage. Trillions of dollars of imagined wealth has gone up in smoke. Trillions of dollars more are about to.

Deflation Has Set In

It is amusing that in the face of this carnage, many are still screaming inflation, stagflation, or even hyperinflation simply because food and energy prices are rising. Deflation is here and now in the US. Deflation is knocking on the door of the UK and Eurozone. And there is nothing that can be done about it.

Can The Fed Print Its Way Out?

Some will insist that I am wrong, that the Fed can print. Well the Fed can print, but the Fed cannot spend. In addition, the Fed cannot give money away, nor would the Fed even if it could. Finally, the Fed cannot force banks to lend or businesses or consumers to borrow.

Bank credit is contracting with the Fed Funds rate at 2%. Bank credit would not be going much of anywhere even at 0% in my estimation. The reason is simple: banks are insolvent!

Janet Yellen’s Recovery Outlook

Flash forward September 15, 2009: The Fed Funds rate is effectively 0%. The Fed would like to cut but can’t as noted in The Problem with Janet Yellen’s Recovery Outlook.

Quotes from San Francisco Fed Governor Janet Yellen

  • “The chances are slim for a robust rebound in consumer spending, which represents around 70% of economic activity. Consumers are getting a boost from the fiscal stimulus package. But this program is temporary.”
  • “It may well be that we are witnessing the start of a new era for consumers following the traumatic financial blows they have endured. While certainly sensible from the standpoint of individual households, this retreat from debt-fueled consumption could reduce the growth rate of consumer spending for years.”
  • “Normally, if credit flows were restricted by these types of financial headwinds, the Fed would ease the stance of monetary policy by cutting its federal funds rate target. But the funds rate is already at zero for all practical purposes, leaving the Fed’s traditional policy tool as accommodative as it can be.
  • “Many versions of the Taylor rule, a well-known policy benchmark based on the state of the economy and inflation, indicate that we should lower the funds rate well below this zero bound — if such a thing were possible.

Sooner or later market participants will figure out this recovery and this rally are both nothing but hot air and wishful thinking. Until they do, enjoy the party. In the meantime, try not to confuse cash-for-clunkers, housing schemes, and other government stimulus programs for sustainable demand. A massive secular shift in attitudes has taken place as cash-strapped, credit weary consumers have at long last decided “Less Is More”.

Mike “Mish” Shedlock
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