Despite the doom and gloom in the mainstream media about the lower than expected retail sales numbers, it is actually a good sign. In the short term anyway, but…
In the long term it could be disastrous. I’ll get to the reasons for that in a moment, but first a look at the numbers.
Whichever way you look at it, it was a big fall. Seasonally adjusted retail sales in February 2009, were 6% lower than the same period last year. And that’s a big difference.
As for the comparison between February and January this year, the drop was even more significant. Seasonally adjusted, retail sales declined by 2% in February against January, but in real dollar terms, the fall was a whopping 12.9%.
Naturally you expect a drop in February compared to the two previous ‘holiday’ months so it’s worth looking at the figures for last year. In February 2008 the drop from the previous month was just 7.5%.
That’s a huge drop in the amount of dollars spent, and clearly a handout from the government isn’t going to fill the gap – nor should it. And it’s a perfect example of how government attempts to prop up a faltering economy can’t possibly work.
It’s plain for everyone to see that globally economies are trying to stop growing. People are afraid they could lose their jobs and businesses are cutting back where they can.
So why won’t $42 billion of the government’s money help? Surely if we stop spending, but something else takes up the slack then this will be good for the economy. Won’t it? Please…
Unfortunately, economies don’t work like that.
You see, politicians and the so-called economists that are advising them have got their numbers around the wrong way. They’ve been trying to tell us for months that it is spending that drives the economy.
You must have heard a countless number of times over the years that the consumer accounts for 70% of the US economy.
But guess what, it isn’t the spending that drives an economy, it is the production. Think about it, if it was only spending that mattered then instead of working for a wage, why wouldn’t the government just give us all a bunch of money every year so we can spend it. That would keep everyone in work and we could spend our money how we like…
Only no-one would be in work because they wouldn’t need to work, so there would be no-one to buy anything from – remember, the government is giving us free money. Of course, thanks to technology, buying things wouldn’t be a problem because we could order things on the internet and get them shipped here…
Except, there would be no-one to provide the internet access and no-one to deliver the goods.
Look, it’s an extreme example. But it highlights perfectly why the focus on spending “to get the economy moving” cannot possibly work. Spending comes as a result of an economy producing things that will meet a demand.
Spending for spending sake – as the politicians, mainstream media and dodgy economists suggest – will not achieve anything.
All the government is doing is borrowing money and handing it out to companies to build things that no-one needs, or to people who don’t want to spend it. At some stage the government will have to pay those loans back. How will it do that unless it comes from higher taxation?
Giving out cash just isn’t going to help.
As I mentioned above, the fall in retail sales is a good thing. We should be happy that at least in this part of the market, the bubble is being deflated (more than we can say about property… see below).
But it is the longer term effects of the ‘free’ handouts that could pose a bigger problem. Although admittedly we are nowhere near the scale of the problems they will face in the US and UK.
It’s appropriate that the German chancellor Angela Merkel has told her US and UK counterparts that Germany has little interest in following their stimulatory lead. And well she should. It is still within the lifetime of some Germans who remember the impact of hyperinflation during the early 1930s.
We’re not quite so sure that we can rely on the Fairy Ruddfather and the boffins at the Reserve Bank of Australia (RBA) to be so prudent.
The problem is with prices and too much money sloshing around. Again, we are fortunate that the RBA and Treasury haven’t gone down the path of printing money yet, but they aren’t far from it with their artificially low interest rates.
You see, when a government issues bonds to borrow money from private investors it is taking cash from savers in order to spend it. In return the investor gets a sovereign backed asset plus an income stream.
The government then takes this money and… well, spends it on bridges nobody wants over roads that nobody needs, or an extra building for a school that can’t afford to maintain the ones it already has. Or, to give out as cash to the public.
But the point is, the investors are saving the money for a reason. Because they don’t want to spend it. They want to save it until they choose to spend it. Of course the government isn’t having any of that nonsense.
And that’s where more problems arise. Eventually the investor will want to, or need to spend it. But because the government has been out propping up a faltering economy there has been little chance for prices to fall.
Prices are being kept higher than they should thanks to interference.
We’ve seen that in the most recent inflation numbers which everyone thought was “unexpectedly high.” It doesn’t surprise us. And it will only get worse.
At the moment businesses are encouraged to keep their prices up thanks to the handouts and other subsidies. So instead businesses are choosing to downsize the workforce. Why cut profit margins more than you have to when you can cut labour?
Without a distorted market you may still get the job cuts, but you would also get price decreases to entice consumers to spend again. That would drive demand and therefore increase employment.
But the consumer will only spend if they believe they are getting something worthwhile for a good price.
Government intervention is only succeeding in preventing the economy from recovering while at the same time helping to increase unemployment and drive up inflation.
Property Columbo
It’s at times like this when we know how Lt Columbo must have felt. He would turn up to the scene of the crime and everyone would be convinced it was suicide – the officers, the coroner, the family, the scene of crime photographer, the murderer, everyone. And then Columbo would spot something, a tiny thing that didn’t seem quite right.
Then we’d spend the next one and a half hours while he ground the murderer into submission and a full confession.
That’s how your editor feels with the property market at the moment. Only, we’ve just turned up to the scene of the crime and everyone’s denying there’s a problem. Except we’ve spotted something that just doesn’t seem quite right.
We’re still trying to figure out how it’s all going to end. We don’t think it will be a happy ending.
I wrote an essay for the Daily Reckoning website on property yesterday. You can read it by clicking here.
Other Stuff on the Markets
The G20 meets in London today and tomorrow. As Peter Schiff says in his video blog, the US is the King Fool and the UK is the court jester.
We shouldn’t expect too much to come out of the G20 apart from more useless government spending.
Gold is still trading at around USD$920. For more info on what gold is up to, take a look at what Adrian Ash has to say on the Money Morning website.