From Sigmund Freud to China

"Dreams are the royal road to the unconscious."

— Sigmund Freud

Friday was Sigmund Freud’s 160th birthday.

We can honor him by honoring his nephew, Edward Bernays, by using our MasterCard to buy things we want but don’t need.

After all, money we don’t have makes the world go round.

Edward Bernays figured out "what makes the world go round." Thanks in part to his uncle Freud’s study of the mind, Bernays developed a keen sense of what determines our hankerings.

So he was tasked with revolutionizing the U.S. economy via the unconscious desires of U.S. consumers.

The rest, as they say, is history — just ask China.

Me, Sigmund Freud & His Nephew

More people like me would crash the system.

One could say my family and I live on a farm (though it’s more like a homestead). We raise animals and grow food.

Similarly, our healthcare depends on essential oils, home remedies, a good diet and staying active.

We paid cash for both our cars, which is easy to do when you drive vehicles nearly two decades old.

We have a traditional mortgage. But in selecting our house we stayed within our means.

A have a slew of daughters whom I may or may not encourage to attend college. After all, secondary education is a racket, save programs geared toward high-skilled professions like doctors and engineers. And if they do, you can bet I don’t plan for exorbitant student loans to factor into it.

And when it comes to any discretionary spending (which is typically pretty minimal with our lifestyle), we don’t use credit cards to fund our purchases.

Despite my hankerings, it’s safe to say my habits don’t fit too well into the consumer mold as espoused by Edward Bernays.

Welcome, Consumer Class

In the 1920s, Sigmund Freud’s nephew, Edward Bernays, worked for a committee founded by Woodrow Wilson to influence public perceptions. Wilson wanted his committee to essentially brainwash Americans into supporting U.S. involvement in World War I.

Bernays would go on to serve President Calvin Coolidge and help the Federal Government generate a consumer class in the United States. He would do so by tapping into — or perhaps awakening — consumers’ unconscious desires that dictate their behaviors and controllability.

It’s quite scary to think about, and owes much to Freud’s psychoanalysis studies.

In this context, consider too the words of Paul Mazur, a leading Wall Street banker working for Lehman Brothers during the same time Bernays was in play:

"We must shift America from a needs — to a desires — culture. People must be trained to desire, to want new things, even before the old have been entirely consumed.

"People must be trained to desire, to want new things even before the old had been entirely consumed. We must shape a new mentality in America. Man’s desires must overshadow his needs."

Sounds familiar … only the explicit hope to generate a new consumer class isn’t coming from America where it is long since established …

A Consumer Dilemma in China

Clearly, consumption is the story of the U.S. economy. And it has been at least since Edward Bernays made an impression.

But by no means is consumption unique to the so-called American Dream anymore. Consumers across the West have become increasingly spend-happy. And policymakers are acutely aware.

Perhaps nowhere is consumption a bigger issue than in China.

In recent years many commentators and newsletter-writers have pitched Chuppies. I can’t be sure, but I think it’s just means Chinese yuppies.

The up-and-coming middle class in China was supposed to lead the way to growth and profits.

Chuppies are supposed to be the new consumer class that would drive global demand.

But that hasn’t exactly happened despite the widespread understanding that China needs to rebalance its economy — away from investment and toward consumption — if they want to produce sustainable economic growth for the long run.

It has been estimated consumption now makes up more than 50% of China’s economy, up from 30% several years ago when the rebalancing saga first gained traction.

That is a step in the right direction since it means consumption has now overtaken investment as a share of Chinese GDP. But the worry is that so much of this "growth" in consumption is actually dependent on a tapped-out investment growth model that been heavily subsidized with stimulus and other official measures.

Indeed, that type of consumption growth is not sustainable. China needs reforms to change the consumption dynamic, not temporary boosts from artificial growth supports.

Plus, Chinese consumers maintain their propensity to save (roughly 30% of their income). After years and years of financial repression, can you blame them?

Chinese corporations are a different story.

Last week I asked What in the World is China Smoking?

As one commentator puts it, the way China is dealing with their economic slowdown is "like smoking opium to look healthy."

Chinese corporations represent the largest risk to the Chinese economy.

Chinese debt levels are growing across the board, but it is their corporate debt levels that pose the most imminent problem for economic activity.

Here’s what I mean about the risk to economic activity — a whole lot more debt is needed to finance GDP gains.

Does this mean China is on the verge of a hard landing?

Well, I’d argue they’ve already landed pretty hard. Actually, they’re still landing.

But I don’t think their current debt picture will generate an imminent economic collapse. The Chinese government still has wiggle room to help ease the debt burden on corporations … to redistribute the previously-perceived wealth, if you will.

But all this begs the question:

When you add China’s newfound debt-binge to the rest of the world, what will it take to send the world over the edge of a cliff?

If not bloated debt levels on public, corporate and consumer balance sheets, what will it be that crashes the markets?

What, when it fails, will "too late" become understood as "too big to fail?"

Us.

With the help of Edward Bernays, the Roaring Twenties were built on stimulating the unconscious desires of America’s consumer class. From that point forward, the United States would come to depend upon the elites’ ability to stimulate consumer demand.

After nearly a century of ebbs and flows … and booms and busts … the elites are losing their power to stimulate demand. A dollar of debt just isn’t worth a dollar of growth these days.

So now policymakers focus their efforts on damage control.

They believe policy boosts consumer morale so they use "coordinated efforts" to do "whatever it takes."

They aim to preserve "financial market stability" as their only chance to "prevent the demise of the consumer."

See?

Everything depends on you and me. Everything depends on our habits, our desires, our perceptions and, perhaps most importantly, our mood.

For if our mood sours and our outlook deteriorates, there is nothing else to make the world go round in the context of a debt-dependent system.

If our view of debt, and our capacity to manage it, changes, we will witness the unraveling of a debt-driven financial system that’s too big to fail.

The system depends on a heavy footprint (sorry, Al Gore). The system stays alive because average people choose, and are increasingly "forced," to live beyond their means.

We are bound in a consumer culture of debt that is the hairpin of the global economy.

If it rattles loose, well  …

"The simple willingness to improvise is more vital, in the long run, than research."

— Rolf Potts

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…