Dave Cohen
Decline of the Empire
October 16, 2010

I’ve been talking this week about the Fed’s much-anticipated QE2 stimulus and its effect on the dollar, commodities, stocks and other markets. If you want the details, I urge you to read all of this week’s posts if you haven’t already done so.

Let’s step back and look at where we stand. If we examine the evidence, we are forced to conclude that the American economy is a bad joke. Let’s look at the stuff I ran across just this morning. Economist Dave Rosenberg summarizes the situation

“Brian Sack at the New York Fed stressed the need for the Fed’s actions to bolster asset inflation as to boost the wealth effect on spending (QE “adds to household wealth by keeping asset prices higher than they otherwise would be…”).  We just can’t seem to wean ourselves off this asset-dependent economy — and how directed by a Fed official that the attempt here is to bring asset values above their intrinsic value. Amazing way to run an economy. Whatever happened to skills, productivity, education, job creation, innovation?  Or thrift — when did that virtue become a dirty six-letter word?”

Yes, Dave, it’s totally & utterly amazing. I’ve also talked about all those missing virtues (job creation, thrift, etc) here at DOTE. And now I give you…

Exhibit A

In a CNNMoney article on soaring commodities prices driven by a weakening dollar, Helicopter Ben Bernanke talks about the virtues of further stimulating the comatose patient.

Commodity prices are surging across the board as the U.S. dollar remains under pressure from building speculation that the Federal Reserve is about to take action to aid the stumbling economy…

Meanwhile, the Reuters-Jefferies CRB index, a key benchmark for global commodities, surged to its highest level since 2008.

Grains and soft commodities like corn, sugar, cocoa, coffee and cotton were also in the thick of the buying frenzy, with prices continuing to hover at yearly highs. (Track commodity prices)

I really haven’t seen prices like this since the early 1980s, said Dan Flynn, an energy trader at PFG Best…

Exhibit B

Rick Sharga, senior vice president of RealtyTrac, tells Tech Ticker’s Aaron Task

If we didn’t have government lending going on right now, there would virtually be no housing market.

On Thursday, RealtyTrac released its third-quarter report on foreclosures, which rose 4% vs. the second-quarter amid a record number of bank repossessions in September, at over 102,000.

Third-quarter foreclosures were down 1% vs. a year ago but that’s a false positive…

Exhibit C

  • A d v e r t i s e m e n t
  • {openx:49}

Gallup polling indicates that lower- and middle-income Americans have sharply curtailed their spending since May. Spending by the large majority of the American people is now the lowest its been since January, 2008 (hat tip, Mish)—

Lower- and middle-income Americans’ self-reported average daily spending in stores, restaurants, gas stations, and online averaged $48 per day during September — down $6 from August and $16 from July. Consumer discretionary spending by these Americans making less than $90,000 a year is now at its lowest level since Gallup began daily tracking in January 2008, as the recession was just getting underway.

Spending by those making over $90,000 a year is holding steady at a much higher level—

Upper-income Americans reported spending an average of $118 per day in September — up $9 from August but virtually the same as they spent in June and July. Spending among this group making $90,000 or more annually is not much different from the $114 they spent in September 2009. Only once — in May — has 2010 upper-income spending exceeded the 2009 new normal upper-income spending range of $107 to $121 per day.

What does all this mean?

The decline in lower- and middle-income Americans’ spending to new lows over the past two months may be a precursor of another significant drop in the overall economy. Gallup’s self-reported spending data tend to measure consumers’ discretionary or marginal expenditures, making these measures highly sensitive to shifting consumer spending patterns.

Gallup modeling suggests that lower- and middle-income spending is significantly more sensitive to job market conditions than is upper-income spending…

Well — there’s a total surprise! Spending by people making less than 90k is significantly more sensitive to job market conditions than outlays by those making more, which is about 12-13% of all Americans with jobs.

In Conclusion…

As commodity prices soar, the stock market rallies, and Ben prepares to drop more money out of helicopters, the housing market remains hooked up to an IV-drip while lower- and middle-income Americans cut their spending to the bone in a desperate attempt to stay upright. And let’s not forget, as NPR reminded me this morning, that the political campaigns are winding down to their meaningless all-important conclusion. Surely our economic problems will be solved once we’ve got a new set of sociopaths concerned citizens in Congress…

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What did Porky say?

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