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10/25/2011

So what’s keeping US economic activity alive and well despite high unemployment, falling real estate prices and horrible macro economic fundamentals? Well, it looks more and more like private consumers are “kicking the can” just like financial and monetary authorities have been doing around the globe.

Despite all the real negative factors that are plaguing the US economy (e.g. job destruction, real estate and more), it appears that every day consumption hasn’t changed all that dramatically.  Retail Sales may not be as strong as it was back in 2007, but the pace is not depicting alarmingly apocalyptic declines as of late.  Even the restaurant sector seems to be picking up a bit relative to the activity in the industry a year ago and  auto sales seem to be doing fine as well.

So with uncertainty over job security, sticky high unemployment, falling real estate prices…where can consumers be getting the purchasing power to maintain perky life styles?  One disturbing answer reflects a “kicking the can” scenario.  Retirement fund (401k) redemptions by consumers are on the rise, as people increasingly take loans out against their nest eggs to maintain living standards and meet near term creditors.  Yes, it seems that there is yet one last ATM available to many and that is the money saved for retirement….and yes, this is a classic “kick the can” scenario. 

The very disturbing element to this alludes to the fact that real incomes are not purely driving consumption but an outside short term source of funds that derives its value solely from increases in prices of financial assets (largely involving US Stocks) is.  This “kicking the can” can help provide a short term shot in the arm to general consumption but at some point, just as Greece must meet is debt obligations, so to must private consumers repay loans taken against retirement accounts.

So if you’re wondering why US stocks don’t ever seem to correct/decline for a sustainable period of time since the 2008 meltdown…just think what would happen to consumption if the value of 401ks would depreciate in value…very scary.