“US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about ‘getting small’ and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

“Not only are the rich trading down, but the article quotes a high net worth financial advisor who said ‘many of our clients are very happy to be sitting on bond portfolios and cash reserves.’ And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the ‘natural look’ – “some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores.”

Right on, David!

And here’s the CEO of Pepsico:

“The age of thrift is here.”

Even in Japan, after 20 years of coughing and sneezing, people have caught “the thrift bug,” says The New York Times.

What’s a consumer economy need in order to keep growing?

Uh…it’s needs consumer spending.

What do consumers need in order to boost spending?

Uh…they need more money!

Oh, there’s where it all starts to come apart, doesn’t it? Where do they get more money? They either earn it…or they borrow it. And right now, they can’t earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can’t borrow it either. The banks won’t lend – not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here’s a headline warning of worse to come:

“$30 billion home loan time bomb set for 2010.”

Even solvent homeowners who aren’t forced into foreclosure still find it beneficial to walk away from their houses. “Strategic defaults,’ says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn’t read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy…walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what’s smart. And now it’s smart to walk away from any debt that you don’t actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They’ve seen what happens when they go too far into debt. They’re older and wiser than they were in the bubble years. It’s been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren’t so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find ‘solutions’ to the ‘problem.’

Actually, there is no problem at all. It’s just the way capitalism works. There are booms. And there are busts. Periods of growth…and periods when the mistakes made during the boom are corrected. There’s a time for every purpose under heaven. That’s the way it works. The economy breathes in and it breathes out.

And there’s always some dumb economist trying to smother it with a pillow!

A report from the world’s biggest bank, HSBC (NYSE:HBC), tells us the dollar’s days are numbered.

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said

The Telegraph reports:

“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.

“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

“A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.”

That said, we repeat a headline from Seeking Alpha:

“Dollar shorts should look out.”

We agree with HSBC and the Telegraph: the dollar will probably slide – especially against Asian currencies – for the next few decades.

But that’s the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens – and it could happen in a ‘Red October’ – the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn’t be surprised by a replay of that ‘flight to safety’ we saw at the end of last year.

But we know what you’re thinking: what? When did the dollar become a ‘safe currency?’ Of course, it’s not safe. But when the end of the world approaches, it will seem safe.

For a while.

Until tomorrow,

Bill Bonner

Source: There’s No Flu Shot for the Thrift Bug

For the first time in quite a while, there were no deliveries in either gold or silver on the Comex Delivery Report. There were no changes [as usual] in the alleged holdings of the SLV ETF…but GLD showed a drop of 186,507 ounces yesterday. The U.S. Mint has another update for us…they increased their gold eagles by another 4,000 and their silver eagles by 150,000…bringing their monthly totals so far to 60,000 and 2,025,000 respectively. And lastly, there were no material changes in silver inventories over at the Comex-approved warehouses.

The only gold story of interest that I could find was over at mineweb.com where the headline read “Saudi retail gold sales plunge: Higher prices and fewer visitors force sales down 30%”…and the link is here. On top of that, the usual New York gold commentator mentioned in his commentary that neither India or Vietnam were importing gold yesterday.

In other news, I note in a Bloomberg story headlined “Credit Card Charge-offs rise again in June”. As a matter of fact, they rose to a record high. The Moody’s credit card charge-off index — which measures credit card loans that banks do not expect to be repaid — rose to 10.76% in June from 10.62% in May. Moody’s also mentioned that charge-offs should peak at 12-13% in mid-2010.” [I wouldn't bet any money on that. It sounds like another case of whistling past the graveyard to me. - Ed]

Not a lot of interesting stories…as it was a ho-hum kind of day everywhere yesterday. The first one is an item that I lifted from Bill Murphy’s MIDAS commentary over at lemetropolecafe.com. It’s a story from the BBC in London. The headline reads “U.K. Debt Hits a Record of £799 billion” One wonders how much hacking, slashing and outright cooking of the financial books it took to get that number below £800 billion? The link is here.

The next story is from Bloomberg. The opening paragraph reads…”The Federal Reserve is “embroiled” in politics and has “stretched beyond reason” its authority to make loans, said William Poole, who served as president of the St. Louis Fed from 1998 to 2008.” The ‘long knives’ are out for the Fed…even from their own people. The short article is well worth the read…and the link is here.

Normally, press releases from the CFTC would not show up in my column, but this one is different. The headline reads…”CFTC to Hold Three Open Hearings to Discuss Energy Position Limits and Hedge Exemptions: First Hearing Scheduled for July 28, 2009″. Ted Butler sent it to me early yesterday morning. He pointed out the fact that one paragraph was all in bold type. Now why on earth would a government press release do that? It stands out like the proverbial sore thumb. Maybe its because the boys over at JPMorgan Chase (NYSE:JPM) [and the other silver shorts] can only read large print. But it sure looks like a warning to me. Ted went on to say that the 8-point list below that describes to a ‘T’ what has to be done in the silver market to bring it back into line with every other traded commodity on the planet. Or, it could mean nothing. You be the judge…and the link is here.

While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort, we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us. – Herbert Hoover, President of the United States…May 1, 1930

To make up for the lack of anything of much interest yesterday…here’s a video I ran at least 18 months ago. I’ve picked up a lot of new readers since then, so I thought I’d run it up the flagpole one more time. It’s not a music video, but turn up your speakers anyway, and then click here. Enjoy!

I’m still sitting on the precious metals fence…waiting to see which way the gold [and silver] price is going to go…but ready to jump into either the bull or bear camp, depending on the outcome. And as I’ve mentioned several times over the last week or so…I’ve got the perfect explanation as to why the price is going up or down…and by now, dear reader, you should have figured that out too.

Enjoy the rest of your day, and I’ll see you here on Friday.

Source: And Then There’s This…Thursday, July 23rd, 2009

Why? Because, Dillow argues, future generations will be richer than our own, and it is basically OK for the relatively poor to affect a transfer of wealth from the relatively rich.

This is a Robin Hood economic argument that I find utterly immoral. Sure, the idea of taxing one set of people to support another is nothing new. In countries such as Zimbabwe and North Korea money is routinely taken from the poor to support the rich elite. Democracy does not put up with that and votes for the reverse.

So in every true democracy, in every civilized country that I can think of, money is transferred via the tax system from the rich to the poor. Few of us have a problem with the principle, even if the detail can sometimes raise objections. But the point is that in a democracy we have a vote, and a vote gives us a chance to influence events.

There are two things wrong with Dillow’s argument, the first of which is that there is no guarantee that the UK will prosper and generate enough surplus cash to pay off old debts. Admittedly this is unlikely… but what is certain, and this is where I really take issue with Dillow, is the fact that the future generations who will be saddled with these debts have no say in the matter.

Our children and grandchildren have no vote, and those that have not yet been born certainly don’t have one either.

What will these descendants of ours think in ten, twenty and thirty years’ time when they look back at these decades? The Labour government will borrow something like £50bn this year. Will future generations look back and say, ‘That was money well spent. That was invested wisely. Thanks to the money spent back then, we are now benefiting’.

I don’t think so

I can think of circumstances where it is fair for governments to borrow money. The first of these is to defend the nation. The most famous government debt of all was War Loan, issued in 1917 to finance the war effort.

Subsequent generations can hardly object to that, because without it they might never have come into existence. It is also possible to make the case for borrowing if the money raised will be used in such a way as to improve the productivity of the economy. A motorway built today will benefit the country for years to come and so why should those who will enjoy the benefits in the future not pay for it? You could just about make the same argument for schools.

But borrowing is a habit that should be discouraged. It is a slippery slope.

The real scandal of the 10p tax climb-down was not that the Government had to revise its budget. That just made it look stupid. The real scandal is that rather than go back and say, ‘Well if I must give £2.4bn to the 10p tax losers, I must take it from somebody else,’ Darling simply borrowed the money. He borrowed money that will have to be raised from some future generation through the tax system in order to save his party’s political skin.

Given that his promise to ‘balance the budget over the course of the economic cycle’ has not been kept, Gordon Brown perhaps regrets having made it in the first place. But it was at least a good idea in principle.

Governments should live within their means, and if they do so they will at the very least set a good example. If governments resort to borrowing as soon as they find that balancing the books is politically inconvenient then they are hardly in a position to criticise citizens from doing the same.

Far too many people in this country are able to get what they want now, because they borrow money without really knowing how they will pay it back. Some of these chickens are now coming home to roost as bailiffs knock on doors and repossess houses.

Debt is not a good thing. Mr Micawber recognised this. Mrs Thatcher recognised this. Even Gordon Brown paid lip service to the principle of living within one’s means. Debts have to be paid somehow and at some time… and this generation that should take responsibility for its debts, and for making ends meet.

The last thing we should do is to dump the problem upon our children and our children’s children.

Source: Don’t Let’s Rob Our Grandchildren!