Today’s much stronger than expected 1.8% increase in March retail sales, while
heralded as good news by Wall Street economists, is actually bad news for the
long-term health of the U.S. economy. Fully one half of the approximately $6
billion month over month increase in spending is attributable to the category
of “building materials and garden supply,” which has seen significant
price pressure lately, and where purchases were no doubt financed by home equity
loans, which will only become increasingly more costly, and a bigger drain
on future retail sales, as interest rates rise.
Had strong retails sales resulted from Americans paying cash to purchasing
greater quantities of increased domestic production, March’s sales figures
would indeed be reflective of economic strength. However, since the increase
resulted from higher prices and credit creation, March’s retail sales numbers
merely reflect inflation.
Today’s stock market sell-off suggests that all of this “good” economic
news has already been discounted, and falling stock prices are likely to help
undermine future retail sales. In addition, though the dollar rallied on the
news, March’s stronger retail sales will ultimately exacerbate dollar weakness
as they will lead to increasing trade deficits and higher interest payments
to foreign creditors.
Although some analysts consider consumer spending to be the
best measure of economic health, retail sales actually measure the consumption
of wealth rather
than its creation. In reality, no celebration should be sparked by the fact
that over-indebted Americans indulged themselves further by purchasing more
imported products on credit. Nor should we rejoice because inflation results
in increased sales though higher prices. By going deeper into debt to consume
today, Americans will be forced to reduce consumption by even greater amounts
tomorrow to allow for the repayment of principal plus interest. Thus future
retail sales will suffer.
The only true way for the real value of future retail sales to grow is for
Americans to save more. Higher personal savings results in interest income,
which enables greater future consumption. However, such a responsible and beneficial
change in consumer behavior is being resisted by the Fed, which is doing everything
in its power to encourage Americans to go even deeper into debt. A decline
in current retail sales, which would result from more responsible consumer
behavior, would likely push the U.S. economy into recession. The Fed, in an
effort to postpone that recession, is only ensuring that the ultimate recession
will be that much more severe.
What so many modern economists fail to understand is that the only true way
that a society can increase consumption is to first increase production, which
must be proceeded by capital accumulation, which, in turn, must be financed
though savings. The19th Century French economist Jean-Bapsiste Say, expressed
this concept well “Encouragement of consumption is no benefit to commerce,
for the difficulty lies in supplying the means, not in stimulating the desire
of consumption; and we have seen that production alone furnishes those means.
Thus, it is the aim of good government to stimulate production, of bad government
to encourage consumption.” Can there be any doubt as to into which category
our current government falls?