Consumers just can’t stop spending…

U.S. consumer debt levels increased by $19.3 billion in December, after November’s steep rise of $20.0 billion, bringing total consumer credit in 2011 in the U.S. to $2.5 trillion (source: Federal Reserve).

Some economists are hailing this as a sign that economic growth is on the rebound, due to the consumer exhibiting confidence by taking on more debt.

Normally, in times of economic growth, income levels rise, job growth is widespread, and consumer assets increase in value, which provides the consumer with wealth (or perceived wealth). In times of typical economic growth, increased consumer credit can be seen as a sign of confidence.

However, in this current environment, we are witnessing real personal incomes falling over the last few years. Wage growth has been stubbornly anemic. We’ve had a minor pickup in job growth, but nothing sustainable as of yet. In the meantime, consumer assets (real estate and stocks) have been flat to down over the last few years. No economic growth here!

Combine this with rising food and energy costs (see “Michael’s Personal Notes” below), and one can only conclude that the increase in credit is a result of people trying to maintain their standard of living and paying their current bills; this is not economic growth.

As I’ve written before, almost one-in-two American households receive some form of government assistance. With the underemployment rate—“U6”—still at 15.1% (the rate includes discouraged people who have stopped looking for work and those part-time that would like full-time work), 46 million people on food stamps and real personal incomes flat, credit expansion can only be the result of the average American’s attempt to hold onto the status quo; forget economic growth.

Compounding this issue is the fact that consumers can no longer rely on interest income from their savings. The Fed is doing everything it can to revive economic growth. Fed Chairman Bernanke admits that savers are able to earn much less than they did in the past, but the hope is that these policies (of keeping interest rates near zero for so long) will help revive economic growth. Low interest on savings is one of the unintended negative consequences of maintaining a low-interest-rate policy.

Bluntly put, you have more American senior citizens than ever looking for work, because they can’t get enough income from their savings and they are concerned they will deplete their savings as time goes by.

With interest income below the level of inflation, those retirees not seeking work—in an environment of weak job growth and slow economic growth—are forced to invest in more risky assets like high-yield and international bonds, and preferred stocks that yield a dividend higher than what interest income pays.

Some retirees and seniors who would prefer not to participate in the stock market, especially with no economic growth, are forced to jump in, in the hopes of attaining returns that are greater than inflation. (Also see: The Great American Retirement Catastrophe.)

Dear reader; I don’t want you believing those who claim that the new increase in consumer credit means good things for economic growth going forward and so higher stock prices. I claim that the increase in credit is just another sign of the average American’s distress.

Michael’s Personal Notes:

I know you’ve been reading my column and hearing me complain about inflation. And you’re probably wondering: is he the only guy worried about inflation? After all, no one else seems to ringing the inflation alarm bell.

Well, dear reader, I have good reason for concern…

Just this past January, global food prices jumped 1.9% across the globe. It was the biggest monthly gain in 11 months (source: United Nations Food and Agriculture Organization). All commodity groups tracked rose, with oilseeds, dairy and grains leading the way.

At a time when economic growth worldwide is slowing, and central banks are cutting interest rates and/or providing liquidity to the system in the hopes of generating some kind of economic growth, their citizens are hampered in their spending, because their personal budgets are being “eaten” away by higher food prices.

Although it is true that here in the U.S. our food costs account for less of our disposable income than in developing countries, keep in mind that low income earners here in the U.S. don’t have that luxury. Their food costs, as a percentage of income, are comparable to developing countries.

In China, for instance, with economic growth slowing, it was widely expected that the government would cut their bank reserve ratio to increase the amount of money in the system. However, in China, inflation rose 4.5% in January, a much higher increase than expected.

While I’m sure Chinese officials would love to cut interest rates to help their economic growth, higher inflation presents a big problem. A further look within the inflation number reveals that the main culprit for the rise of inflation was food inflation, which surged 10.5% year-over-year…yes, 10.5%! Only factory prices eased, consistent with my belief that economic growth is slowing globally.

China’s interest rate cuts would target slowing economic growth, which is hurting their factories and export sectors. Yet those pesky food prices keep rising and rising in China.

The dilemma of economic growth here in the U.S. centers on the Federal Reserve. The U.S. dollar is the reserve currency of the world. This means that all commodities, including oil and agricultural commodities, are priced in U.S. dollars.

If the Fed embarks on QE3 to spur economic growth, this will result in a fall in the value of the U.S. dollar against other world currencies (except maybe for the euro), which, on the other side of the coin, will automatically cause all commodities, including oil and food prices, to rise (because they are priced in U.S. dollars). This will dampen demand. (This is what we witnessed with QE1 and QE2, and I certainly believe the pattern will continue, should there be a QE3.)

On the one hand, QE3 will attempt to repair certain areas of the economy in order to spur economic growth. On the other hand, it will cause inflation in all commodities, which will affect everyone around the world, especially consumers here in the U.S. Just the rise in oil prices alone will slow economic growth.

There can be no question that the explosive growth in the population and the strange weather patterns around the world also influence food prices. We have a global population of 6.9 billion people, with every expectation of exceeding seven billion in 2012 (source: Census Bureau).

Rapidly rising food costs are proof of inflation both here in the U.S. and abroad. It is a factor that is hampering economic growth and central bank policy decisions around the world. Be wary of talk of inflation being subdued and of deflation being the problem. There is ample evidence to the contrary. (Also see: Higher Commodity Prices Pushing Inflation Limits.)

The government has increased its debt by approximately $5.0 trillion in four years. The Fed has increased the size of its balance sheet by approximately $2.0 trillion in the same period. No country can issue so much debt and create so much new money without creating inflation. History has proven this.

Hence, we have the reason why gold bullion prices have risen 470%. As the economy slows further in 2012, as the Fed unleashes QE3 to deal with the softening economy, gold prices again rise with inflation.

Where the Market Stands; Where it’s Headed:

I read the headline, “U.S. stocks post worst day of the year” on a very popular financial web site Friday night and I just laughed. If they think Friday was bad (a paltry 90-point drop by the Dow Jones Industrial Average), they ain’t seen nothing yet.

We are in Phase II of a bear market rally that started in March of 2009. The purpose of Phase II bear markets is to lure investors back into stocks. This market is doing an excellent job of achieving that goal.

The Dow Jones Industrial Average is only a stone’s throw away from the 13,000 level. More and more stock advisors are turning bullish and investors are starting to feel the stock market is a safe place to invest again. This is exactly what the bear wants; more suckers lured back into stocks.

But we have some time to go, dear reader. The bear market rally’s business is not done yet. The majority of investors are still not convinced that stocks are the place to be again. We are getting to that point, but, until we do, the bear market rally will continue to preside over the general stock market.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only second and third mortgages. Bottom line: the lower interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.