It’s the holiday season, when consumers shop like no other time of the year.
They also run up credit card debt like no other time of the year!
If you watch the financial news, you’ll see a lot of focus on consumer spending. The analysts will wonder if shoppers will show up to give the economy a good boost.
There is no doubt that holiday sales are important to retailers…
If you’re looking to buy a stock such as Best Buy or Wal-Mart, you will certainly want to pay attention to sales.
Unfortunately, along with holiday shopping come some economic myths. The main myth is that consumer spending will help the economy. This view is promoted by Keynesian economists, but it is often accepted even by advocates of the free market.
There is confusion over cause and effect.
Look at it this way: A wet road does not cause it to rain.
By the same token, consumer spending doesn’t make us any wealthier — at least, not as a whole.
There is nothing wrong with consumers spending money, even on toys or luxury items. But we must realize that in order to consume, there must first be production.
Spending money on holiday gifts does not help the overall economy. If anything, it is simply a reward for previous production and wealth creation.
Is the Economy Improving?
Let’s say we see an increase in consumer spending this holiday season as compared to previous years.
Does this mean the economy is improving?
That depends. If there is an increase in spending because there’s more wealth to be consumed, then this is a good thing. This is how a society gets richer. We see an increase in our standard of living.
On the other hand, if the increased spending is draining resources and is not due to an increase in wealth generation, then this is a bad thing, as it means the spending is not sustainable. Consumers will eventually face having to cut back.
Don’t Buy the Fed Lie
When we see situations where consumers are spending more than is sustainable, we can usually look to monetary policy as a possible culprit.
When the Fed is inflating the money supply and keeping interest rates artificially low, it’s sending false signals to the marketplace that there are more savings than actually exist.
This leads both businesses and consumers to make bad decisions. People may temporarily feel richer than they actually are, leading them to spend more on Christmas gifts than they really should, given their true savings.
Don’t Be Fooled
If we see strong sales this season, it will likely be taken as good news that the economy is improving and thriving. While it probably would mean a short-term boost, we shouldn’t fool ourselves into thinking it’s sustainable.
If sales are relatively weak this season, I don’t expect to hear about it as much from the financial news media. But it could mean people are already feeling a struggle, even with all of the prior monetary inflation from the Fed.
Ironically, although most everyone seems to hope for strong sales, this economy actually needs less in the way of consumer spending. While that may not be good news for certain businesses in retail, it would be better news for the average American down the road.
Unfortunately, some people — especially the Keynesian economists — don’t like to look down the road. They want to eat, drink, and be merry today. They are always trying to kick the can down the road for another day.
We Could All Be Rich
An economy doesn’t grow because of consumer spending.
If it were that easy, everyone could go shopping, and we could all be rich.
As well, an economy doesn’t grow because of consumer demand.
Most people I know have a lot of demands. Most people want a luxury car, a flat screen television, a bigger house, and all of the new gadgets. But they either can’t afford those things, or they realize they shouldn’t overextend themselves — and should save some money instead.
If consumer demand were all it took to make an economy grow, ours would be growing at an extraordinary pace. In fact, virtually every other place in the world would be growing at great rates, too.
Don’t you think people in Ethiopia would like to own nice things? Are they poor just because they lack consumer demand?
The way an economy grows is through production and wealth creation. Wealth is generated through prior savings and investment. If everyone spent everything they earned, nobody would ever get ahead.
Bottom line: You must have capital investment in order to increase wealth generation.
Again, consumption is the reward for prior production.
As a society grows wealthier, it can consume more because there is more to consume, whether in the form of goods or services. But let’s not be fooled into thinking consumption somehow makes us richer.
This is simply confusing cause and effect.
Your Holiday Shopping
You shouldn’t feel it’s your patriotic duty to go out and spend money to help the economy.
The truth is you would actually be helping the economy more by saving your money.
At the same time, you shouldn’t feel bad about spending money on gifts or anything else. If you earned the money, then your personal consumption is your reward for your prior production.
If you are putting your purchases on a credit card to be paid down the road (I would advise against this), then you are consuming what others have produced with the promise that you will turn over some of your future production to them.
In terms of investing, you should pay attention to holiday sales only if you are looking to buy individual stocks.
I wouldn’t depend on sales to give you a good idea of the shape of the economy. The numbers might make a small difference in the short run, but we don’t know if consumers are spending money based on real savings, or if they are being fooled into thinking they have more savings than actually exist.
Perhaps you just received a nice Christmas bonus and raise. That may not translate into real wealth if you are paying higher prices at the store next year.
We should all remember that having more money in our pockets doesn’t necessarily mean we are richer.
The Fed is continually creating money out of thin air and causing resources to be misallocated on a grand scale…
It’s easy to be tricked into thinking we are doing better than we actually are.
Until next time,
Geoffrey Pike for Wealth Daily
