Consumer Shutdown
By Adrian Ash
May 8, 2008
Now all the cheap money's
vanished, how will consumers make ends meet...?
THE CHEAP MONEY BUBBLE might have gone pop. But
everywhere we look, the Mischief
of Cheap Money continues to cause mayhem for investors,
savers, retirees, even school children.
"I've been in school service for 27 years and this is the
worst it's ever been," said Sara Gasiorowski, a food
services director for the school board in Indianapolis, to CNN
Money on Wednesday.
"I have never seen food prices jump up so far."
Ms. Gasiorowski is now shuffling ingredients and switching menus
to make her budgetary dollars stretch where they used to. But
with each dollar buying ever less stuff, "there isn't
enough money to go around," grumbles Lynnelle Grumbles, the
wonderfully-named food service director of Visalia Unified
School District in central California.
"For every penny on a carton of milk, it costs me $30,000 a
year," she told the newswire. Note the 22% rise in her
local milk prices since April '07 and "that's $105,000
extra on my food bill."
Overall, says the Bureau of Labor Statistics, US food prices –
nationwide – have risen by 4.5% in the last 12 months. Here in
the UK, according to the British Retail Consortium, food-price
inflation is running at an "inflation-busting" 4.7%
per year.
Throw in the 6.6% rise in travel fares – plus a 5.3% rise in
motoring costs, the 5.8% rise in housing bills, and the 4.7%
increase in the cost of heating and light at home – and you
might wonder quite how the UK statistics agency came up with its
latest "cost of living" figure.
The official Consumer Price Index rose by a mere 2.5%
year-on-year in March. Thank heavens for all those furniture and
clothing-store discounts! Without those mass fire-sales on
discretionary goods, the cost of living would be rising nearly
twice as quickly.
"Food prices are accelerating at their fastest rate since
records began," reports the Daily Telegraph, "fuelling
a rise in the average family's shopping bill of £750 a year
[$1,480].
"The rate of food price inflation is making life
increasingly difficult for the millions of families already
struggling to make ends meet under the weight of rising council
tax bills, mortgage repayments and energy costs."
In short, making ends meet is getting increasingly tough for
consumers on both sides of the Pond. "Food prices were one
of the issues we mentioned constantly," said Jean-Claude
Trichet, head of the European Central Bank, when summing up the
latest G10 meeting of finance chiefs on Monday.
"It is an additional element adding to the energy prices,
to the metal prices and a number of commodity prices and that is
really at a global level a very important phenomenon."
Never mind how we got here. Not for today, at least. Just how
will consumers – meaning savers, investors and retirees –
square this circle of surging costs?
The real mischief of the cheap money bubble, we think here at BullionVault,
is not only that it's pushing living costs higher as the value
of money evaporates.
The true mayhem is that consumer credit's dried up just as
consumers need it the most.
Put inflation to one side if you can. Because in nominal terms,
average weekly wages for US workers rose on average 4.5% per
year over the last four decades and more.
Total consumer loans from the commercial banks, on the other
hand, grew by 7.6% per year.
Since Alan Greenspan took the chair of the Federal Reserve,
consumer loans have very nearly tripled. Hourly incomes –
before accounting for increases in the cost of living – failed
to double.
Time was, of course, that asking your bank for a loan was
scarier than demanding a pay rise. But "innovative"
credit turned that on its head. And so just as in the United
Kingdom, the real driver for US consumer spending over the last
decade and more has been the availability of cheap money.
Now the cheap money's vanished, where might consumers find
enough cash to pay the bills?
Novel problems require novel solutions. And so "borrowing
from retirement plans is surging," reports the Wall
Street Journal.
"At the end of last year, 18% of US workers had loans
outstanding from their plans, up from 11% in 2006, according to
a survey by the Transamerica Center for Retirement
Studies."
US and UK consumers have been hocking their futures for so long
already, borrowing another few years from their retirement can't
hurt. But what if saving – instead of borrowing – really
does make a comeback? What if the '90s and '00s consumer boom
ended with a return to pre-bubble pay demands?
"We cannot afford to get back into that culture of the
1970s and early 1980s," as Mervyn
King, Bank of England chief, said to the UK parliament late
last month. "People felt we can take gambles with what pay
increases we agree because in the end the government will give
in and allow inflation to rise to validate those
decisions."
Now "we cannot do that" urged the Trimmer. So instead,
he's now lending £50 billion ($97.5bn) of taxpayer's money to
London's biggest banks, hoping they'll pass it onto consumers
and keep the cheap money bubble expanding.
Otherwise, King warned yet again, inflation might get a
foot-hold in people's wage expectations. As it is, for now,
inflation remains locked on the debit side of household
accounts. And that risks a shutdown in consumer spending until
wages turn higher – or prices stop rising.