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“The regulatory agencies and the federal government were complicit in laying the groundwork that allowed many of these credit excesses to develop prior to this economic crisis. Had they done their job effectively, the economy would not have been pushed to the brink of collapse. I fundamentally disagree with these “rescue” programs since we believe our impaired financial system is being distorted by protecting inefficient and questionable business enterprises. Misguided measures to re-stimulate consumer borrowing, beyond just getting the system functioning, are highly questionable. This net worth destruction is the most severe since the Great Depression. We have a news flash for the government, creating new credit programs for a consumer who was spending almost $1.1 trillion more than they were earning in spendable income, according to MacroMaven’s estimate, will be a non-starter. More leverage is not what they need. Encouraging the consumer to take on more debt is like trying to help a recovering heroin addict lessen his pain by providing him with more heroin.”
If there is one chart that tells the tale of the U.S. economic demise, it is the graphic below. It illustrates the transformation of a country that saved and invested to a country that borrowed and spent. In 1981 consumer expenditures accounted for 62% of GDP and private investment accounted for 19% of GDP. Consumer expenditures soared to 70% of GDP while private investment plunged to 11% of GDP. The American economy needs to revert back to the healthier percentages of 1981. Essentially, American households need to spend $1 trillion less per year and use this money to pay down debt and increase savings.
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The Personal Savings rate as a percentage of disposable income dropped below 0% in 2006. Over the last 50 years, the average has been 7.2%. The rate has been below this average since 1992. The rate has recently reached 4% as delusional Boomers are beginning to grasp their bleak future. Boomers always seem to go too far. They will eventually wear the badge of frugality as proudly as they wore the badge of over-consumption. Robert Rodriguez sees an 8% savings rate on the horizon.
“A dramatic rise in the U.S. personal savings rate will be required to begin the mending process of the consumer’s balance sheet. I expect the U.S. personal savings rate will rise from 2% to 8% this year and remain at an elevated level for the foreseeable future. This process should increase savings by approximately $650 billion annually. An increase of this magnitude, in such a brief period, is unprecedented, other than during WW2, when it rose from 12% to 24% between 1941 and 1942. Assuming some earnings on this incremental savings and a partial recovery in the stock and real-estate markets, it will likely take ten years for the consumer’s net worth to return to its pre-crisis level.”
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Anyone anticipating a consumer led recovery is counting on consumers who have been whacked in the head with a 2 by 4 to stagger to their feet and say, thank you sir may I have another? Even with interest rates at extremely low levels, household debt service is 14% of disposable income, versus the 30 year average of 12.1%. As interest rates rise, this burden will break the consumer’s back. The only way to avoid this fate is a substantial pay down of debt.
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The only difficulty with paying down debt is you need cash to pay it down. For decades, from the 1940s until 2000, Americans were cautious about debt. They always had an emergency fund for those unexpected expenses that always pop up. If your washer broke, a TV crapped out, or your lawn mower stopped working you had the cash on hand to buy a new one. This attitude became passé as we entered a new century. Who needed cash when you received three credit card offers per day in the mail? Today, not only do most Americans not have cash to cover unexpected expenses, they don’t have cash for milk and bread. A vast swath of America pays for their cigarettes, lunch meat, and morning coffee with a credit card. This has resulted in a net $4 trillion deficit of household cash versus household liabilities. Is this normal or abnormal?
Now that Americans have used up all the equity in their houses, and some, they have turned to their last resort – credit cards. The government has handed billions of taxpayer funds to the biggest credit card issuers in the world (Bank of America, JP Morgan, Citicorp, Wells Fargo, Capital One, and American Express) so they will continue to give grossly overly indebted Americans more rope to hang themselves. This ridiculous solution will destroy the National balance sheet and the people who continue to spend more than they make. We are running up the National credit card balance and passing the bill to future generations. Credit card delinquencies are already at the highest level in history. With 25 million (U6 – 16.4%) people unemployed, out of a work force of 155 million, another 2 to 3 million likely to lose their jobs, house prices still falling, and foreclosures likely to top 2 million in 2009, credit card delinquencies will surge to unprecedented levels in 2010. Does anyone really believe our biggest banks are solvent?
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The New Normal
“Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible. To preserve independence, we must not let our rulers load us with perpetual debt.”
Thomas Jefferson
The last three decades have not been normal. They’ve been Abby Normal. When a society chooses to spend more than it produces, the only people who get rich are the bankers lending out the money. For a society to progress, its citizens must save more than they spend. The excess savings can then be utilized to invest in long-term assets that will increase the wealth of the nation. A society needs to produce more than it consumes, or it will eventually wither away. Debt keeps Americans enslaved to the corrupt bankers and clueless government bureaucrats who run our fair country.
