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Politics / US Politics Apr 02, 2011 - 05:52 AM GMT

By: Mike_Whitney

Politics

Best Financial Markets Analysis ArticleThis has gotta be a joke. According to a new report by the BEA, personal consumption expenditures (PCE) increased by $69 billion (7 percent), while personal income rose by only $38 billion (3 percent) in February.

So consumers are back to their old ways again, spending more than they earn?


Er, not exactly. The truth is, consumer spending is slowing down because food and energy are taking a bigger chunk out of the old paycheck. After factoring in inflation, personal consumption is up just 3 percent while real income fell to 1 percent. So, inflation makes the numbers look a lot different.

The reason all this matters, is because consumption is 70 percent of GDP, so if the consumer is on the ropes and getting pummeled by stagnant wages and inflation at the same time, then you can bet the economy is headed for the dumpster. Of course, a good portion of the blame for this mess goes to Ben Bernanke whose miracle QE2 elixir has kept the stock market bubbly while commodities and food prices have skyrocketed. That's the real source of the problem, an uneven policy that rewards the investment class while leaving the workerbees (you and me) fending off soaring prices.

Bernanke says we shouldn't worry about the higher prices because core inflation is still low. (roughly 1%) That's easy to say for guy who's never filled his gas tank in his life, but for everyone else inflation is a killer that forces them to cut their spending or shed more debt, neither of which is easy to do.

So, yes, personal consumption has gone up, but only by a hair. The truth is, people are running harder just to stay in the same place. They're not making any headway at all. In fact, this whole myth about credit-addled shoppers going crazy at Macy's so they can load up on designer jeans and Italian leather boots, is pure bunkum. For most people, it's a hand-to-mouth existence 24-7. Most of their time is spent figuring out how they can stretch the budget or feed a family of four on pinto beans and Velveeta. They don't have the doe for luxuries, unless you consider Spam a luxury.

Of course, the reason for this is that all the gains from worker productivity in the last 30 years have gone to management. The front office rakes in the golden ducats while the workers get a pat-on-the-head and a "see ya later, Charlie". It's the same everywhere. Take a look at this in the WSJ:

"Consider that back in 1970, wages, salaries and employee benefits accounted for about three-quarters of total U.S. personal income as measured by Commerce. Dividend, interest and rental income contributed about 14%, while government-backed benefits, including disability, unemployment and welfare, were less than 8% of the total.

That changed in the ensuing decades as government programs expanded, the population aged and wealth disparities increased. By 2005, salaries, wages and benefits were about 67% of the total. In 2010, they dropped to 64%. Meanwhile, the shares of total income from dividend, interest and rental income and, especially, government benefit payments increased....

Unfortunately, the dwindling share of wage income fits with the broader erosion of the U.S. middle class. Roughly 40% of consumer spending these days is generated by the upper fifth of households. UniCredit economist Harm Bandholz notes that the share of U.S. consumption financed by labor income has steadily declined to about 61% today from 85% in 1970." ("Income Gains Not Lifting All Boats", Kelly Evans, Wall Street Journal)

Funny how that works, eh? Funny how American-style capitalism is like a big conveyor-belt trundling all the wealth to those on the top floor. And, it's getting worse too. The gross inequality now exceeds the period before the '29 Crash and rivals the robber barons era. Hey, we're back in the Gilded Age.

And what are all these fatcats doing with their mountains of money...planning for the future, building a stronger economy, reinvesting in America?

Hell, no. They're swapping paper assets with each other to goose the market so they can leave their bratty kids another billion or two before they meet their maker. Don't believe me? This is from Bloomberg:

"U.S. executives are starting to spend the record $940 billion in cash they built up after the credit crisis, just in time for annual shareholder meetings. Takeovers topped $256 billion this quarter... Standard & Poor’s 500 Index companies authorized 38 percent more buybacks in 2011 than a year earlier and dividends may increase to a record $31.07 a share in 2013...

Chief executive officers are looking for ways to increase investor returns after posting THE BIGGEST GAIN IN PROFITS SINCE 1988 by relying on near-zero Federal Reserve interest rates and cost cuts that have kept the unemployment rate near a 26-year high....Companies in the S&P 500 have been piling up money for two years as per-share profit jumped 36 percent in 2010, the most in more than two decades...

Companies including Limited Brands Inc., owner of the Victoria’s Secret chain, are relying on debt to reward shareholders. The drop in borrowing costs to a three-year low has given executives the incentive to sell bonds and use the proceeds to repurchase stock and pay dividends...

S&P 500 companies have approved $149.8 billion in share repurchases in the past three months...

“Having this much cash on the balance sheet earning essentially nothing is hurting companies’ numbers, it’s hurting their return on equity, it’s hurting their ability to provide income in the long run for investors,” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “If they can’t find something better to do with it than leave it as cash, the best thing is to return it to shareholders.” ("CEOs Tap Record Cash for Dividends as M&A Picks Up", Bloomberg)

Right. Having all that cash lying around is a big problem. Can you believe the arrogance?

Anyway, you get the idea. Corporate USA and big finance have joined together to drive up stocks by buying up their own shares, mergers and acquisitions, debt-pyramiding, and even borrowing money to issue dividends; whatever it takes to pluck the goose one more time before the economy takes another nosedive. And, notice that none of these strategies involve increasing demand, hiring workers, or cobbling together a vision for the future. Oh no; it's all slash and burn capitalism; grab what you can and then fight-like-hell to hide it from the taxman.

And these same people have the audacity to talk about "profligate consumers"?

Give me a break. Big business is nothing more than legalized fleecing disguised as legitimate enterprise. You'd have to be a fool to buy their PR-hype. Here's more from Anne Lowrey on Slate:

"According to the Bureau of Economic Analysis, real corporate profits neared an all-time high in the last three months of 2010, with companies raking in an annualized $1.68 trillion in pre-tax operating profits.... The Federal Reserve estimates that companies are sitting on about $1.9 trillion....

How can the corporate economy be so profitable while the jobs economy remains so weak? Part of the answer lies in improved productivity. When the recession hit, businesses fired millions of workers then asked the rest to make up the difference—and, in many cases, they did. Productivity increased 3.9 percent in 2010, while labor costs fell....

...in the last quarter of 2010, the story was all about Wall Street. Profits actually decreased a bit at nonfinancial firms. But companies like investment banks and insurers saw profits climb to an annualized $426.5 billion. The financial sector now accounts for about 30 percent of the economy's overall operating profits....

Still, record-high profits do not necessarily translate into improvements in the economy—as the country's 14 million jobless workers would be (not so) happy to tell you. For the past year, companies have hesitated to spend all of that cash, worried about a lack of good investment opportunities and fearful about demand. The upside is that it seems they are beginning to spend down their $1.9 trillion pile. The downside is that it does not seem that it will be to the immediate benefit of American workers." ("More Profits, Fewer Jobs", Annie Lowrey, Slate)

So the corporate mukky-muks and financial alchemists have figured out how to fatten the bottom line without hiring workers. Great. So, you and I can spend our days watching soaps and panhandling at the freeway on-ramp, while moneybags speculators catch 9-holes at the Club. What a racket.

This two-tiered system only serves the interests of the privileged few and their spoiled kids. The only way to level the playing field is by ripping it up and starting over.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2011 Copyright Mike Whitney - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.
Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Ernie Messerschmidt
02 Apr 11, 19:40
start over with what?

good conclusion. Okay, rip it up and start over with what?

How about an objective scientific examination of what is working now in the world and what has worked in the past? Ideas and facts in Ha-Joon Chang's "Bad Samaritans" and "23 Things" and Ian Fletcher's "Free Trade Doesn't Work" seem like good starting places to me. Nations need to look after themselves and be sovereign. Sovereign public banking with credit produced for the benefit of the whole society. Cut out the financial parasites completely and bury that institution for good. Confiscate their stolen wealth. Redistribute wealth. Heavily progressive taxation and heavy inheritance taxes. Cut back military to only 5% of the present - plenty for real self-defense. Socialize medicine and big pharma. Free college education for true scholars only. America for Americans: do away with illegals, unassimilable immigrants, and dual-citizens.


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