Though I have stated in previous emails that it is production not consumption
that is the engine that drives the economic train, even if a “stimulus” package
is enacted which leads to a temporary increase in consumer spending, this increase
will do nothing to prevent further job losses. That is because most of any
increase in consumer spending will be on imported products. In the past America’s
foreign suppliers were willing to recycle their earnings back into the U.S.
economy though investments in U.S. financial assets. But with the lowest REAL
interest rates in the world, an over-valued stock market, skyrocketing budget
and current account deficits, and a weakening U.S. dollar, foreigners are less
willing to invest in U.S. assets. Therefore, increasing consumer spending will
have a minimal impact on the earrings of U.S. companies, and will therefore
not translate into job growth. Ironically, any short-term increase in consumer
spending inevitably sows the seeds of its own destruction. The growing current
account deficit which such spending produces will eventually result in foreigners
actually become net sellers of U.S. financial assets, putting additional downward
pressure on the dollar and upward pressure on U.S. interest rates and consumer
prices. This will ultimately reduce consumer spending, further undermine the
U.S. economy, and make U.S. financial assets that much less attractive to foreigners.
This will set into motion a self-perpetuating spiral of foreign selling of
U.S. dollars, resulting in additional interest rate increases, resulting in
further economic weakness, causing additional foreign selling of dollars, and
so on and so on. Furthermore, as rising interest rates and increasing unemployment
ultimately prick the housing bubble, American consumers (many of them now unemployed)
struggling beneath a mountain of debt, rising prices, and higher interest rates,
will no longer have any home equity left to tap into to keep their economic
heads above water.