What happens to a consumer-driven economy when consumers are tapped out?

 

In our previous discussions about inflation, we've focused on the (deliberately) erroneous figures provided by the authorities.  For example, in December the Consumer Price Index was said (officially) to be 6.5% higher than a year previously.  Those of us who use our hard-earned cash to buy what we need are fully aware that 6.5% is a laughably low estimate of the real inflation rate.  Using my earlier SWAG (scientific wild-assed guess) of multiplying the official inflation rate by 3.5 in order to arrive at approximately the real rate, that would make inflation last year plus-or-minus 23%;  and even that's low compared to Armstrong Economic's estimate of 32%.  My wallet tends to agree more and more with the latter.

This must inevitably affect our assessment of how the economy is doing.  Something like 70% of the US economy is driven by consumer expenditure.  However, when we measure what consumption expenditure is doing in real life, we have to factor inflation into the picture.  So, for example, we read that "Sales during November and December grew 5.3% year over year to $936.3 billion".  That sounds great . . . until we recall that inflation last year was officially 6.5%, and in reality several times that.  In other words, that year-on-year growth of 5.3% was a negative growth rate when compared to the buying power of the US dollar.  Consumers may have spent more, but their money bought less - in other words, fewer goods were sold.  Not much good news there.

That's also adding to the debt burden on consumers.  They no longer have enough cash in their pockets, so they're turning to credit to make up the shortfall.  "Total US household debt hit a record $16.9 trillion during the fourth quarter [last year] ... Credit card balances increased nearly 6.6% to $986 billion".  Trouble is, sooner or later those debts have to be repaid - and already-tapped-out consumers don't have the spare cash to do so anytime soon.  In response, credit card issuers are increasing their provisions for bad debt;  but such provisions eat into their profits, which means they need to claw back as much of those losses as possible . . . which in turn means they charge us more, to make more profit from those who can afford to pay.  In effect, we're subsidizing those who can't pay.  Feels good, doesn't it?

That's also why we see retailers contracting, shedding unprofitable stores and trying to build up their more profitable core business in areas where people at least have money to spend.

Retailers to Shut Down Over 800 Big-Box Stores as Inflation, Anemic Sales and Interest Rates Create Perfect Storm

Bed Bath & Beyond, Walmart, Gap, and Party City are among the big names who will be downsizing. Bath & Beyond, which narrowly escaped bankruptcy proceedings earlier this month, is the biggest loser, aiming to cut its number of stores to 480 when it once had over 1,500 locations.

Next up is homegoods outlet Tuesday Morning, which will close 265 stores as it struggles to survive through bankruptcy proceedings. Once again, California will be hardest hit, with 30 stores shutting their doors.

Macy’s, Big Lots, JCPenny, and even Amazon Fresh grocery stores also have plans to shutter locations.

CVS, Rite-Aid, Kroger, Nordstrom, and Best Buy have also been quietly culling their stores over the last several years. Another factor: many locations are closing simply because they’re not safe to operate as lax laws and woke prosecutors have turned many spots into virtual free-for-alls for organized shoplifters.

There's more at the link.

That sounds good from the retailers' point of view:  closing unprofitable stores will mean they lose less money, and can add value to more profitable areas.  However, think about it from the perspective of consumers who lose their local store.  They have to travel further to buy what they need, which is more expensive for them;  and if they don't have their own vehicle, they become more dependent on public transport, which is increasingly crime-ridden, infrequent and unreliable.  (Also, from a purely practical perspective, try managing several plastic shopping bags on a bus!  I have.  It's a losing proposition, particularly when flimsy bags break and spill your shopping all over the floor.)

There's also the security risk involved.  Local law enforcement sources tell me that of all the Walmart stores in Big(ish) City nearby, one is much worse than the others in terms of shoplifting, muggings, panhandling, etc.  What happens if that one is closed?  The thieves and muggers aren't going to go away.  No, they're going to move to where their "target market" is:  the other Walmart stores!  That's going to make the crime situation near those stores that much worse, affecting everyone in the area.  It's gotten to the point that some people in higher-crime areas will only shop at Walmart if they can order over the Internet, and collect their goods at a prearranged place and time the following day, minimizing their exposure to that risk.

And all of those consequences flow, more or less, from the fact that American consumers in general are running out of money.

Makes you think, doesn't it?

Peter