Why people spend....

Below is a transcript of an interview with Nouriel Rourbini, (one of the few economists who got the housing bubble right), on Bloomberg T.V.

My response to the interview is: So....other than that, Mrs. Lincoln, how did you like the play?

Here's where you might be thinking I would be agreeing with the old Bear. But, in fact, I think people spend money. They are addicted to spending money. I think they'll keep spending money. They're willing to spend money. They want to spend money. Spending money is what they do!

It's beginning to look like I'll have three months at least even with last year in the first half of the year, and three months waaayyyy under. So which is the true indicator? Complicated by the fact that the last six weeks have been great.

I'm going to guess about 10% lower than last year this July and August. Nationally 10% would be considered a disaster, but in my store it's not a significant figure, as long as I budget correctly. My spending is way down, so my profits are up.

THE ARTICLE:

The retail sales figures for May - better than expected - were driven by a temporary factor, the tax rebates, whose influence will fade out by early fall.

Instead, more persistent factors will bear negatively on consumption over the summer and especially the fall: the fall in home prices and the collapse of home equity withdrawal (with their wealth effect on spending); the stressed balance sheets and high debt ratios of the household sector (such debt is up to almost 140% of disposable income); the credit crunch in mortgage markets that is now spreading to unsecured consumer credit (credit cards, student loans, auto loans); the rise in debt servicing ratios (following the reset of mortgage rates, and higher interest rates on mortgages and consumer credit); the sharp rise in gasoline and energy prices that is a serious shock to real incomes; the further erosion of real wages through the rise in the inflation rate; the sharp fall in consumer confidence; the drop in employment (now five months in a row) and thus in income generation; the negative wealth effect of the correction in equity markets and the fall in the net worth of the household sector. All these factors will have – over time – a much more significant negative effect on consumption than the temporary boost given by the tax rebates.