Money makes the world go round and its absence stops it in its tracks. Three important economic statistics reveal how important borrowing money is to the global economy. Borrowing is so critical, that its evaporation reveals a key economic insight -- prices are higher than customers can afford to pay out of their own pockets. This suggests three ways to get the economy moving: let prices fall to the level where customers can pay without borrowing; boost customers' income; or reopen the credit spigots. I'd vote for option one.
The bad statistics are in factory orders, auto sales and retail sales. Factory orders fell by 2.5% in September, four times faster than the 0.7% drop analysts expected. Automobile sales plunged more than they have in the last 25 years -- for example, General Motors Corp. (NYSE: GM) sales fell 45% in October. And retail sales are expected to fall 0.1% in October -- the weakest same-store sales result ever registered since Thomson Reuters began collecting estimates in 2000.
What a glorious economic mess the 43rd president is dropping into the lap of our 44th. All these contractions in sales share a common theme -- when companies and people can borrow money at low rates, they can afford to buy things. But when that credit dries up, their cash flows "from operations" are too small to close the deals.
But such a culture shift would mean prices would have to come way down for people to be able to pay them. Imagine that -- making an economy work for the average person. Could it happen? We'll soon see.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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