The Great Deformation (120 page)

This epic generational mistake stemmed in large part, as has been seen, from the Fed's serial asset bubbles in stocks and housing, which egregiously misled households about their true wealth; and also from the un-warranted confidence that the nation's vast social insurance benefit distributions could be sustained indefinitely and in full. A crucial pivot point in American financial history has thus arrived because all of these foundational assumptions are about to be invalidated.

Housing asset values have already crashed by 33 percent and have mounted only a tepid recovery. But they will soon undergo another thundering setback when the baby boom retirement army is forced to liquidate millions of empty nests in order to survive financially. Needless to say, the
next generation, saddled with $1 trillion of student debts and small earned incomes, will not be open to buy. Since prices inexorably fall in a bidless market there will be nothing to break the decline except an insolvent government.

The social insurance system is now entering an era of permanent funding crisis and chronic political turmoil. And, as detailed in
chapter 32
, the Bernanke stock market bubble is heading for a thundering meltdown which will vastly eclipse that of September 2008. So what lies ahead is endemic fiscal crisis, wrenching financial market dislocations, and relentlessly rising fear about financial security on Main Street.

All of this will cause household behavior to change fundamentally; that is, it will lay low America's vaunted “consumption units.” Indeed, the coming sharp rise in tax rates and savings rates will cause a drastic hit to consumption spending even if these adjustments take several years to unfold. For example, if a $1 trillion increase in household savings and taxes is rolled in over five years, it would reduce the nation's $11.1 trillion level of PCE by nearly 2.5 percent annually in nominal terms. For a half decade running, therefore, the central component of GDP could be reduced by 5 percent annually in real terms (assuming 2–3 percent inflation).

Needless to say, recidivist Keynesians and their supply-side fellow travelers will propose “economic growth” as the way out of this emerging economic box canyon of higher taxes and higher savings. But their fiscal panaceas of lower taxes or higher spending will be powerfully thwarted because these measures require extensive balance sheet runway—that is, short- and medium-term deficits—that no longer exists.

To be sure, advocates of fiscal stimulus will claim growth multipliers based on one or another set of “goal-seeked” statistical manipulations. But unless they want to sign up to Art Laffer's magic napkin, none of the policy measures available will be close to 100 percent self-financing. Given a 20 percent marginal Federal tax take, for example, fiscal stimulus measures would need to generate a 5X GDP multiplier in order to break even. And that is the profound dilemma of peak fiscal debt: there is no remaining headroom in the national debt for policy makers to gamble with play money stolen from future taxpayers.

So the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin—the price of abandoning the financial discipline achieved by Dwight Eisenhower and William McChesney Martin during the mid-twentieth century's golden age.

CHAPTER 32

 

A
S DETAILED IN
CHAPTER 31
, EVEN THE TEPID POST-2008 RECOV
ery was not what it was cracked up to be, especially with respect to the Wall Street presumption that the American consumer would once again function as the engine of GDP growth. It goes without saying, in fact, that the precarious plight of the Main Street consumer has been obfuscated by the manner in which the state's unprecedented fiscal and monetary medications have distorted the incoming data and economic narrative.

These distortions implicate all rungs of the economic ladder, but are especially egregious with respect to the prosperous classes. In fact, a wealth-effects driven mini-boom in upper-end consumption has contributed immensely to the impression that average consumers are clawing their way back to pre-crisis spending habits. This is not remotely true.

Five years after the top of the second Greenspan bubble (2007), inflation-adjusted retail sales were still down by about 2 percent. This fact alone is unprecedented. By comparison, five years after the 1981 cycle top real retail sales (excluding restaurants) had risen by 20 percent. Likewise, by early 1996 real retail sales were 17 percent higher than they had been five years earlier. And with a fair amount of help from the great MEW raid, constant dollar retail sales in mid-2005 where 13 percent higher than they had been five years earlier at the top of the first Greenspan bubble.

So this cycle is very different, and even then the reported five years' stagnation in real retail sales does not capture the full story of consumer impairment. The divergent performance of Wal-Mart's domestic stores over the last five years compared to Whole Foods points to another crucial dimension; namely, that the averages are being materially inflated by the up-beat trends among the prosperous classes.

For all practical purposes Wal-Mart is a proxy for Main Street America, so it is not surprising that its sales have stagnated since the end of the
Greenspan bubble. Thus, its domestic sales of $226 billion in fiscal 2007 had risen to an inflation-adjusted level of only $235 billion by fiscal 2012, implying real growth of less than 1 percent annually.

By contrast, Whole Foods most surely reflects the prosperous classes given that its customers have an average household income of $80,000, or more than twice the Wal-Mart average. During the same five years, its inflation-adjusted sales rose from $6.5 billion to $10.5 billion, or at a 10 percent annual real rate. Not surprisingly, Whole Foods' stock price has doubled since the second Greenspan bubble, contributing to the Wall Street mantra about consumer resilience.

To be sure, the 10 to 1 growth difference between the two companies involves factors such as the healthy food fad, that go beyond where their respective customers reside on the income ladder. Yet this same sharply contrasting pattern is also evident in the official data on retail sales.

INSIDE RETAIL: LESS FOOD, LESS STUFF

One striking example pertains to grocery store sales. Hidden in the numbers for this core segment is the astonishing fact that inflation-adjusted grocery store sales have fallen by 6 percent since 2007. This is absolutely off the charts, given that real grocery store sales have never fallen at all during any five-year period since 1945. Inflation and food stamps, however, explain why this baleful trend has not been noted by the “consumer is back” touts on Wall Street.

The reported data show a 16 percent sales gain, with grocery store sales rising from $490 billion to $570 billion during the five years ending in August 2012. But that is before adjustment for the 15 percent increase in the food price index during that period—which the Fed chooses to ignore—and, even more importantly, the explosive growth of the food stamp rolls. Tracking the faltering Main Street economy, the latter has soared from 26 million to 47 million recipients since the Greenspan bubble burst. As a result, the food stamp share of grocery store sales increased from 6 percent to 13 percent during the period, or by about $45 billion.

The safety net is absolutely necessary, and apparently no one has informed the monetary politburo that the people can't eat their iPads. Yet what is left after food inflation and the surge in food stamps are set aside is what Main Street households are actually spending in grocery stores out of their own resources. That number was $430 billion in the fall of 2012 (2007$), meaning that households bought $30 billion less of food and groceries in real dollars than they did in 2007. No single figure could better refute the notion that the average American consumer is rebounding or give
more effective witness to the actual financial distress among Main Street households.

Nor is it the case that average households have decided to eat less and buy more “stuff” instead. The Census Bureau reports a subcategory of retail sales called GAFO and it includes most basic dry goods and necessities including clothing, shoes, electronics, furniture, furnishings, appliances, sporting goods, stationery supplies, and the like. In the fall of 2007 the sales rate for GAFO was $1.15 trillion, but notwithstanding forty months of recovery from the Great Recession, the sales rate by late 2012 was still down by $75 billion, or nearly 7 percent in inflation-adjusted dollars.

This unprecedented plunge in real GAFO sales is another crucial indicator that the era of shop-until-they-drop consumers is over. After all, the GAFO sales category embodies the very “stuff” that has been relentlessly accumulated in American closets, pantries, garages, living rooms, bedrooms, and kitchens for nearly a half century. Again, the break with prior cycles could not be more dramatic. During the five years after the 1991 downturn, for example, real GAFO sales rose by 18 percent. Likewise, helped along by MEW, it rose by 9 percent during the five years ending in mid-2005.

In the more discretionary categories, the reversal from prior recovery patterns is even more dramatic. Lawn, garden, and hardware sales fell by 18 percent in real terms during the five years after the 2007 peak. Five years after the July 2000 peak, by contrast, sales in this category had risen by nearly 25 percent. In a similar vein, new car sales have fallen by 10 percent in real terms during the last five years compared to nearly a 40 percent gain during the 2000–2005 cycle.

In short, the shopping basket of Main Street households has sprung a giant leak, thereby nullifying the consumer-as-Energizer-bunny predicate underpinning Wall Street's recovery narrative. The four basic retail categories reviewed above—grocery, GAFO, lawn/hardware, and autos—accounted for two-thirds of retail sales, or about $2.7 trillion at the August 2007 top. Five years later constant dollar sales in these four basic segments were $2.45 trillion, meaning that household purchases had declined by a stunning $250 billion, or 9 percent.

This condition defines the post-Keynesian reality now upon the nation, and also hints at the perverse effects of the Bernanke money-printing spree. As indicated, on an inflation-adjusted basis total retail sales fell by 2 percent, or $70 billion, during the five years ended in August 2012. Given the $250 billion drop in the four core categories reviewed above, the implication is that all other retail categories grew by a goodly $170 billion. Not surprisingly, the overwhelming share of this latter figure is accounted for
by online sales, which grew from $300 billion to $400 billion in real terms during 2007–2012.

Yet the online retail channel remains heavily the province of the prosperous classes. According to surveys by the National Retail Federation, households with incomes under $50,000 account for only
about 20 percent of online sales, indicating that average consumers have realized only a small share of the e-commerce uplift.
By contrast, nearly 40 percent of online sales were attributable to households with incomes above $100,000.

So in the short run, the Fed's wealth effects policy has delayed the day of reckoning: it has encouraged the top 10–15 percent of households, which own 90 percent of the nation's financial assets and which have benefited from the 115 percent rise in the S&P 500, to resume the consumption party.

TALE OF TWO RETAILER GROUPS

That the consumption party is highly skewed to the top is born out even more dramatically in the sales trends of publicly traded retailers. Their results make it crystal clear that Wall Street's myopic view of the so-called consumer recovery is based on the Fed's gifts to the prosperous classes, not any spending resurgence by the Main Street masses.

The latter do their shopping overwhelmingly at the six remaining discounters and mid-market department store chains—Wal-Mart, Target, Sears, J. C. Penney, Kohl's, and Macy's. This group posted $405 billion in sales in 2007, but by 2012 inflation-adjusted sales had declined by nearly 3 percent to $392 billion. The abrupt change of direction here is remarkable: during the twenty-five years ending in 2007 most of these chains had grown at double-digit rates year in and year out.

After a brief stumble in late 2008 and early 2009, sales at the luxury and high-end retailers continued to power upward, tracking almost perfectly the Bernanke Fed's reflation of the stock market and risk assets. Accordingly, sales at Tiffany, Saks, Ralph Lauren, Coach, lulu lemon, Michael Kors, and Nordstrom grew by 30 percent after inflation during the five-year period.

The evident contrast between the two retailer groups, however, was not just in their merchandise price points. The more important comparison was in their girth: combined real sales of the luxury and high-end retailers in 2012 were just $33 billion, or 8 percent of the $393 billion turnover reported by the discounters and mid-market chains.

This tale of two retailer groups is laden with implications. It not only shows that the so-called recovery is tenuous and highly skewed to a small slice of the population at the top of the economic ladder, but also that statist economic intervention has now become wildly dysfunctional. Largely based on opulence at the top, Wall Street brays that economic recovery is
under way even as the Main Street economy flounders. But when this wobbly foundation periodically reveals itself, Wall Street petulantly insists that the state unleash unlimited resources in the form of tax cuts, spending stimulus, and money printing to keep the simulacrum of recovery alive.