The American Spending Mindset

Correspondence between me and my brother in law.

Hi Fonz,

I have done a lot of thinking about your thesis of inflation fuelled by the unquenchable desire of the American consumer. Please don’t see this debate as rude, but I am trying to flesh out my own thesis on the markets so I think we will both benefit from this discourse.

Although I am attracted to the underlying logic of your claim; yes deductive logic seems to point in the direction of lower interest rates = increased spending, my suspicious mind is telling me rather that it doesn’t always have to be this way. There must be a point of saturation whereby the desire for future spending reaches a point of zero marginal utility, or maybe even negative-“mu”. I would like to propose that comparing the US consumer to the Japanese consumer to support your thesis may be a red-herring.

If I understand your hypothesis correctly, you are saying that the American is not like the Japanese consumer, if an American is given “easy money” he will spend it, whilst a Japanese consumer has an in-bread saving mentality.

In order for me to do this debate justice I need to do a lot more research, I believe I need to research the Japanese Deflation story, if you know of any good books on this subject I will be most grateful. My sense is that one needs to understand the Japanese psyche and its relationship with money more clearly. Yes they may be savers on a consumption level, but I “think” they are uber-investors on the other hand. A deeper understanding of their attitude to money is therefore in order. As a side note, I believe they have fallen for the exact same “bubbles” as have the Americans with their Stock and Real Estate Bubbles in years gone by.

Here comes my gut-feel thesis. I think it will be worthwhile for me to do more research on this before calling it my thesis, but let it stand as such for now.

The American public through the ages has had varied attitudes towards money, it has had periods pre The Great Depression of consuming and investing excess, it has followed The Great Depression with periods of cautious saving. In essence the general mood of the American people, and their attitude to consumption and investment has varied through the decades in large cycles often longer than decades.

A further question I wish to pose in light of this theory is, “Does it matter whether over-valuation is caused by excess investment or consumption?” Is money not money, and the impact of its velocity agnostic to its form? Does the cause of a bubble have any bearing on the mindset of the public (investor/consumer)? This too is worth exploring from a Behavioral Finance point of view, do people with lots of toys and gadgets and homes feel better than investors with a large profitable investment portfolio. My cursory comment would say from a mental accounting point of view the consumer will feel better off as he has experienced the joy of his consumption whereas the investor has only enjoyed the ephemeral benefit of a profitable investment portfolio. This statement on its own would seem to support your hypothesis, but I believe all one can deduce from this understanding is the degree of the bubble. I would say that the bubble of a consumption led over valuation is prone to be far bigger in size than an investment led one.

Before wrapping this mail up I think we need to bring one further wrinkle into the equation, i.e. the effect of globalization. Does it in fact matter what the American attitude towards credit is? Yes the major portion of the US GDP comes from the consumption spending of the American investor. This to a large extent is caused by the profits the American based companies are making. I don’t know the answer to this question but I suspect a large part of these profits are being driven by the current “perfect storm” being experienced in the global economy with demand for American products enjoying record appeal. What if the central banks of the global economies take a more cautious approach to inflation and tighten the money supply.

In conclusion I would like to say the following:
There is every possibility that the current growth phase in the US economy is likely to continue unabated.
There is every possibility that the current inflation in the US is on the verge of an explosion.
There is every possibility that the current growth phase in the US economy is about to end with a recession and possibly a depression.
There is every possibility that the current inflation in the US is about to reverse into a cycle of continued deflation as the asset bubbles created in stock and real estate portfolios – pop.
The only thing I believe we can forecast at this stage is the probability of each scenario.


I hope this is a coherent dialogue, I am at gym in the coffee shop and I am expressing my thoughts freely without too much contemplation.

Regards


Mickson