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TheFederalReservesstaunchlydovishstanceoninterestratessincethefinancialmeltdownandensuingglobaldebtcrisishasdonelittletospur(small)businessdemandforloanablefunds,whichwould,accordingtoclassiceconomics,encouragebusinessestotakeoutcheaploans.Thesecheaploanswouldideallybespentonrampingupproductionandthusincreasingemployment.This,however,hasnotbeenthecase,duetothestatus-quoliquiditytrap,which

hasameliorateddomesticdemandforloanablefundsasaresultofalackoftrustintheFedandpessimismoverthenear-termaggregatedemandparadigm.Theseextremelylowinterestrateshavealsodiscouragedhouseholdsfromkeepingcash,astheyseeverylittlebenefit(nearlyzeropercentinterestrates)fromputtingtheirmoneyintobankaccounts.Individualconsumershavedecidedtospendtheirincomethroughoutthisrecession,ratherthansaveit,whichistheconverseofhowUSbusinesshavedecidedtotreatthetrillionsthattheycurrentlysiton.

Quarter-on-quarter,seasonallyadjustedPersonalConsumptionExpenditurequotedinmillionsof

USdollars.Source:BureauofEconomicAnalysis.TotalPersonalConsumptionExpenditures(PCE)hasincreasedbyabout3.7%fromthefirstquarterof2009tothefirstquarterof2011,whereasconsumptionofClothingandFootwear,asubsetofthetotal,increasedby8.6%.ExpenditureonServicesincreased1.4%,andFood&Beverageexpenditureincreasedby5.4%.ExpenditureonGasolinedecreasedby3.8%.Thesequarter-onquarterexpenditurechangesrevealsomeinterestinganomalieswhencomparedtothequarter-on-quarterpercentagechangeinprices:

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Quarter-on-quarterpercentagechangeinConsumerPriceIndex(CPI).Source:BureauofEconomicAnalysis.Theexpendituresonmanygoodsincluding:gasoline,food&beverages,andpersonalcomputershaveincreasedevenasquarter-on-quarterpricesofthosegoodswasfalling.Wecanconcludethatconsumer(discretionary)expenditurehasincreasedoverthepasttenquarters,

asthepricesofthegoodsbeingpurchasedasfallen,inmanycases,butalsointhecaseofclothingandfootwear,wheretheincreasingcoreCPIstandsasapriceindicator.Thetakeawayfromthisisthatconsumersarespendingrobustly,eventhoughtheeconomyremainslaggard.Thisisevidentthroughrecentcorporateearnings,especiallythoseofthesummerof2010,whereitbecamethenormforcompaniestoannounceexpectation-shatteringsalesnumbers.RetailerslikeMacys($M),Costco($COST),andJCPenny($JCP)haveseensolidsalesfiguresandhavemovedintandemwiththemarketthroughout2009and2010,untiltheypulledawayfromotherindustriesandbecameahigherbetaplayinthesummerof2010.Thiswasallpredictabletosomedegree,butlesspredictablehasbeenthemeteoricmovementinluxurygoodstockprices.

Lowinterestrateshavebeenthesparkforthenation-wideincreaseinexpenditure(savingsaversion),butsomethinglessconsideredbyWallStreethasbeentheaftermathoftheover-leveragingoftheGreenspanEraintothepresenttime.Inthepost-Techbubbleenvironmentofthe2000s,manyhouseholdsover-leveragedtheirwealthwithcheaphomeloans.Aportionofthoseloansweredefaulteduponduring2007,afteritbecameclearthattherecipientswereterriblyundeservingofsuchcheapcredit,whichwereprimarilylowandmiddleincomehomes.Numeroushomeloans,though,weretoupperclassorborderline-upper-classhomesthathoppedonthecheapcreditbandwagon.Theseupperclassloanrecipientshavenotdefaultedontheirloans,butstillhavethebenefitofhavingover-leveragedtheirsavingsandincomeastrongcasefortheincreaseddemandofluxurygoods.Anotherdriverforluxurygoodshasbeenhealthyinternationaldemand.CountriessuchasChinaandIndiahavebeenhotsince2009(somewouldsayonfire)andhaveseenhighlevelsofconsumption-driveninflation.Luxurygoodsbeingnon-denominationalinnaturemeansthattheyaredemandedbythewealthyworldwideandarenotdependentononeparticulareconomyorsubjecttocountry-specificsubstitutes.

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