Two plus two is four. At extreme values of two, two plus two can be five — as in 2.45 plus 2.45 (rounded down to 2) equals 4.9, or five rounded up. But two plus two can never equal six.
And therein lies one of the great misconceptions in the U.S. economy today: Once you exceed the limits of some given number, you have to start borrowing to get to the next level. And that’s where the breakdown begins.
To be clear, I’m talking about the U.S. consumer — a beast upon which the U.S. economy largely rests, but a beast upon which little extra straw can be added without a bone snapping.
I know my words will sound out of sync to some because much of the business media hammer on a message of consumer resilience, such as this little bon mot from the Financial Times: US consumer strength buoys the dollar.
But those same media don’t dig beyond the headlines … and beyond the headlines a future wasteland awaits.
Let’s consider the two primary factors that impact the U.S. consumer: jobs and income.
Jobs: Job growth, we’re told by economists, Fed officials and a stenographic media pack, has been robust. Numerically speaking, one might be able to argue that point. (Though the trend since October isn’t encouraging.)
Qualitatively speaking, one would be a buffoon for suggesting the jobs market is strong — and lots of buffoons are bumbling around out there.
As I’ve shown many times, the jobs the American economy is creating are largely low-wage jobs in fast food, hospitality and low-skill health care. These are not the jobs that build a financially sound middle class because they pay well below the median income.
Income: Average hourly wages have grown at a lethargic pace of 2% a year since the end of the financial crisis, which circles back around to the previous jobs factoid. When an economy is creating mainly crappy jobs, the economy is going to experience crappy income growth because the welter of low-pay jobs more than offsets the well-paying jobs that do come into existence.
Now, let’s overlay those two facts atop two fairly shocking data points:
- U.S. consumer debt is on pace to surpass $1 trillion this year — the first time we’ve reached that level since the financial crisis. This isn’t mortgages or auto loans and leases. This is revolving debt, such as credit cards.
- Real, median household income in America, per the St. Louis Fed, is down more than 6% since just before the financial crisis.
And, so, we now come to the big head-scratcher: How can a consumer class buoyed by crummy jobs, tepid income growth and median household income that’s in retreat be approaching $1 trillion in revolving debt?
There can only be three possibilities. The American consumer is either:
- Struggling and making ends meet on the good graces of MasterCard and American Express;
- Back to living aspirationally by whipping out the plastic and borrowing from their home equity;
The data suggest the answer is No. 3.
The fact that revolving debt will exceed $1 trillion this year is proof of at least part of Point No. 1 — that the consumer is living off MasterCard and American Express.
And I think it’s safe to surmise that there is some struggling involved, given anemic income levels and all the yammering about wanting a $15 minimum wage.
As for Point No. 2, that answer exists inside quarterly data collected by the Federal Home Loan Mortgage Corp., aka Freddie Mac. Here’s the visual to explain it:
The chart shows the percentage of mortgage-refinancing activity that includes at least 5% cash back. We’re nowhere near the precrisis insanity, but the quantity of American households using their home as an ATM once again is clearly on a rapid ascent now that “home equity” is a thing again.
The Dying Consumer
This is where I come back to my assertion that two plus two can never equal six.
Just like a two finally taps out at extreme levels, so too, will the American consumer tap out at some point. There’s only so much equity to suck from a house. And there are few opportunities for meaningful wage growth in an economy swaddled in debt and hamstrung by a technology revolution that is obviating the need for workers to begin with.
The economy already breathes heavily under the weight of a strongish dollar, prodded along by negative rates in much of the rest of the developed world that makes the greenback comparatively attractive (and hurts U.S. manufacturers and exporters). The U.S. government, already burdened by history’s largest accumulation of debt, hasn’t the capacity to keep spending uncontrollably without fueling a crisis of confidence in the currency. That leaves the consumer as the last leg of a wobbly three-legged stool — and the U.S. consumer, once again approaching oxygen-deprived levels of debt, can’t keep this spending spree alive indefinitely.
When the consumer finally taps out — a day that’s not far away — then what?
It’s a question worthy of serious pondering if you wish to protect your lifestyle. For the only solution to all that ails this country is a financial reset that will right the economy at the cost of great pain on Main Street.
The only shield you have against that pain is physical gold. I sound like an echo chamber, I know. But there’s a reason gold has continued to hold its value above $1,000 an ounce, when so many have (wrongly) claimed its day in the sun is done.
Those who see how all these dots connect realize that we either face a crisis or a great reckoning to repair nearly 40 years of Keynesian-inspired monetary stupidity built on the premise that debt doesn’t matter. Gold, as I’ve written many times, played a part in every financial reset back to Roman times.
It will be no different this time around.