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Consumer doubts justified

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Saturday, July 26, 2014, 9:00 p.m.
 

Consumer confidence is regarded generally as a prerequisite to economic revival.

Despite a gain of 3 points last week, Gallup's U.S. Economic Confidence Index reported on Tuesday that its latest survey found confidence at minus 15. That figure is flat from April and May, and down more than double from minus 7 a year ago.

Following five years of major quantitative easing and negative real interest rates under the Federal Reserve's zero interest rate policy, the fact that the economy is sputtering at best must alarm the Fed. It raises the crucial question of why consumer confidence has fallen overall since Janet Yellen, an arch Keynesian, took over as Fed chair in a world awash with liquidity.

In theory, the Gallup Index ranges from plus 100 to minus 100. Any reading below the mid-point indicates pessimism. In Gallup, more than 34 percent consider the American economy as poor. More concerning, some 58 percent think it is getting worse, the most negativity since December.

The reasons for such pessimism are financial, economic and political.

With regard to personal finance, most ordinary consumers suffer from flat wages. Indeed, if discounted for any realistic rate of inflation, average wages in America have fallen during the past five years. In the face of higher taxes, people are feeling poorer.

Reported last week, the Consumer Price Index, including food and energy, rose in June by 0.3 percent, or an annual rate of 3.6 percent. Savers, given only 0.10 percent on bank deposits, are paying the banks 3.5 percent just to hold their money. Recognizing the disparity, consumers are spending largely — usually on necessities, but often taking advantage of discounts.

Those whose income allows them to own financial assets such as equities, bonds, commodities and even real estate gain handsome returns. Most consumers, however, feel increasingly impoverished.

The Fed has had its pedal to the metal pumping money into the economy. But this has not encouraged consumer demand — likely because simultaneously the government discouraged business confidence and enterprise by increasing taxes and regulations.

Americans who grew up when the United States was economically the strongest and richest nation now see America as the world's largest debtor. International tensions in places such as Iraq, Syria and Ukraine have exposed a dramatic fall in America's political influence and military power.

Because of its fading power, historically loyal allies are becoming less supportive. This is deeply depressing to Americans.

With shrinking personal wealth, a stagnant economy and fading national prestige, it is little wonder that American consumers are nervous. They hoard cash, even at negative returns, rather than spend it.

If Congress and the Obama administration continue to spend excessively, they will be tempted to increase taxes and regulatory barriers to enterprise, stifling the economy further. Until these profligate habits are curbed, the vital consumer confidence will remain elusive.

It is clear that falling consumer confidence results from failed political leadership. More cheap money is unlikely to reverse this condition.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne70@yahoo.com.

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