Holiday Spending and the Fed

The veil of illusion that says the dollar has value is being torn away.


Last week’s “Saturday Night Live” had an actor playing President Obama giving a press conference with an actor playing China’s President Hu Jintao, who repeatedly reminded Obama that the US owes China a lot of money. At one point, Hu asks, “Do I look like Mrs. Obama?”, answering the question soon after with: “Then why you try to make sex with me like I was Mrs. Obama!”


Some things can be said in a joke that can’t be said with a straight face.

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Imagine telling someone back in 1989 that in twenty years China would be the world’s emerging power, and the US would be running to China to ask for more money to plug its enormous deficits, while reassuring China that its money is secure, and politely asking China to respect copyright rules and ensure free internet access (which China will politely ignore).


So where will we be in twenty years from now? The dollar will be discredited, a shell of its previous value, no longer a reserve asset. The world will want currencies backed with real assets, not fiat paper which can be printed at will with the touch of a keystroke.


In the US, anger is rising about the massive financial bailouts engineered by the Fed and the Treasury, which so far have not caused any reduction in unemployment or real economic stimulus. Perhaps this sentiment is why Rep. Ron Paul’s amendment to audit the Fed has passed a vote in committee and is gathering support in both houses of Congress. In a surprise move, Rep Barney Frank delayed a vote on the bill until after the Thanksgiving recess.


Why does the Fed oppose being audited so vociferously? Bernanke says he doesn’t want the Fed to be too influenced by short-term politics, but it’s hard to see how the current veil of secrecy prevents politics from entering into the Fed’s deliberations. The country ought to know what the Fed is doing (or was doing, as the bill calls for the release of information only with a 6 month lag).


Early reports on Black Friday, the largest single shopping day in the US, indicate a very small increase in spending over last year of 0.5%. Strangely enough, articles on Black Friday never seem to adjust sales figures for inflation. Given that the CPI rose 0.5% in the last two months, it’s more accurate to say that spending is flat or declining in real terms. We’ll have more details on the numbers in a few days, but the trend toward more frugal spending is still in force. Even if an increase is recorded, we have to keep in mind that retailers are offering massive discounts, which may pull sales to Black Friday at the expense of other days. We’d also do well to recall what products are being discounted: mostly electronics, which are rarely produced in the US. Increases in retail spending on imported goods puts the US economy in a deeper hole. We need to come to balance, and that won’t happen because of an unsustainable surge in retail spending, but rather will be due to growth in the productive sectors of the economy.