Strong Retail Sales Reflect
Inflation Not Growth
February 15, 2005
Today's larger than expected .6% increase in January Ex-Autos
retail sales, while heralded as good news by Wall Street economists,
is actually bad news for the long-term health of the U.S. economy.
In the past twelve months over-all retail sales rose 7.2%, while
the ex-auto gain was 7.6% By far the category registering the
largest percentage increase was gasoline, up 17.3%, followed
by building material, hardware and garden supplies, up 14.1%.
The latter category, which has seen significant price pressure
lately, includes purchases which were no doubt financed by home
equity loans that will only become increasingly more costly,
and a bigger drain on future retail sales, as interest rates
In addition, much of the increase in retail sales resulted from
greater purchases of imported products. Had strong retails sales
resulted from Americans paying cash to purchase greater quantities
of increased domestic production, last year's sales figures would
indeed have been reflective of economic strength. However, since
the increase resulted from higher prices, rising imports and
credit creation, increasing retail sales merely reflect inflation.
Further, as the bear-market rally in stocks appears to have ended,
and with the housing bubble closer to bursting, reduced household
"wealth" is likely to undermine future retail sales.
In addition, rising interest rates will divert an increasing
percentage of household income to debt service, reducing the
share available for discretionary spending that goes in large
part toward retail sales. Similarly, as highly indebted consumers
look to pay down debt and replenish their non-existing savings,
future retail sales will suffer. Most importantly, increasing
retail sales have produced larger trade deficits and a weaker
dollar, which intern will lead to rising import prices and higher
future interest payments to foreign creditors.
Although some analysts consider consumer spending to be the best
measure of economic health, retail sales actually measure the
consumption of wealth rather than its creation. In reality, no
celebration should be sparked by the fact that over-indebted
Americans indulged themselves further by purchasing more imported
products on credit. Nor should we rejoice because inflation results
in increased sales though higher prices. By going deeper into
debt to consume today, Americans will be forced to reduce consumption
by even greater amounts tomorrow to allow for the repayment of
principal plus interest. Thus future retail sales will suffer
as a direct result of their own artificially enhanced past strength.
The only true way for the real value of future retail sales to
grow is for Americans to save more. Higher personal savings results
in interest income, which enables greater future consumption.
However, such a responsible and beneficial change in consumer
behavior is being resisted by the Fed, which is doing everything
in its power to encourage Americans to go even deeper into debt.
A decline in current retail sales, which would result from more
responsible consumer behavior, would likely push the U.S. economy
into recession. The Fed, in an effort to postpone that recession,
is only ensuring that the ultimate recession will be that much
What so many modern economists fail to understand is that the
only true way that a society can increase consumption is to first
increase production, which must be proceeded by capital accumulation,
which, in turn, must be financed though savings. The 19th Century
French economist, Jean-Baptiste Say, expressed this concept
"Encouragement of consumption
is no benefit to commerce, for the difficulty lies in supplying
the means, not in stimulating the desire of consumption; and
we have seen that production alone, furnishes those
means. Thus, it is the aim of good government to stimulate production,
of bad government to encourage consumption."
Can there be any doubt as to
into which category our current government falls?
February 15, 2005
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C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
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