Peter Schiff: Uncle Sam Funds Christmas in January

After three straight months of sagging retail sales, American consumers flush with stimulus money went on a spending spree last month. Retail sales surged 5.3% to start the year, significantly beating expectations. In his podcast, Peter Schiff called it Christmas in January.

The Christmas season was a disaster for retailers. Sales dropped in October and November and then fell again in December. In fact, the Commerce Department revised December sales down from a 0.7% drop to a 1% decline.

The expectation for January was a 1.1% gain, so 5.3% was a huge beat. And when you take out automobile sales and gasoline, the gain is even bigger – 6.1%. Peter called these “big, big numbers” with Americans spending a lot of money.

Spending on electronics and appliances was up 14.7%. Furniture sales were up 12% on the month. Online spending at non-retailers jumped 11%.

So, Americans were really spending a lot of money in January. The question is where did they get it? As Peter said, the answer is obvious – from the US government.

Where did the US government get it? From the Federal Reserve. Where else? After all, the second round of stimulus checks, those $1,200 checks (for a married couple) got mailed out at the end of December, which means Americans had them in their hot little hands where they were then burning holes in their pockets by early January. And so they promptly took that money to the store and spent it. And that was responsible for the big increase in consumer spending, despite the big jump in unemployment we had in January.”

Peter pointed out that we actually have more Americans unemployed today than at the depth of the 2008 financial crisis.

So, with all of these Americans unemployed, you would not normally expect them to go on a shopping spree, except that’s exactly what they’re doing thanks to the US government rewarding Americans with all of this stimulus money.”

It’s not just that stimulus checks that put money into Americans’ pockets. Uncle Sam continues to hand out enhanced unemployment benefits. With the combination of stimulus and super-sized jobless benefits, a lot of unemployed people are making more money now than when they were working.

Peter brought up another poignant question: where is all the stuff Americans are buying being made? The answer is not in America.

These are all imports that Americans are spending money on.”

Inflation is likely another reason the retail sales numbers popped last month. People are paying more for the stuff they’re buying. Retails sales numbers are not inflation-adjusted. It reflects the dollar-amount Americans are spending. Looking at the year-over-year gain drives this home. It came in at 7.4%, the biggest y-o-y gain since September 2011. The year-over-year gain on core retail sales was 11.8%, the biggest jump in the history of this index.

And we have all these unemployed people. The secret to the supposed success is this money-machine that we’ve now discovered. People don’t need jobs. They don’t need to work. All we have to do is print money and mail out checks, and we can have this booming economy. Except it’s not really a booming economy. It’s a booming consumption binge. It’s a shopping spree financed with debt.”

Peter said given that most of the production is happening overseas, the US is about to post the biggest trade deficits in American history.

Where did the retailers get all this stuff to sell to these unemployed Americans? Well, they got it from importing it because we don’t make it. And as fewer Americans are working, well clearly those Americans aren’t helping to produce stuff. So, we have to rely on workers overseas who are going to work and who are making stuff. And that’s what’s enabling Americans to consume.”

Wall Street views the big jump in retail sales as economic strength, but Peter insists it isn’t.

It’s not strength when you’re just spending money that the Fed prints and running huge trade deficits. It’s weakness. But Wall Street doesn’t understand the difference.”

In this podcast, Peter also talked about the Fed minutes that came out last week.