In an increasingly schizoid American society, public attitude about the economy rank as our most bizarre contradiction supplanting even our love for violence coexisting with our desire to be the world's peacekeepers. Over the past several years, President Bush has steadfastly assured us the economy is solid, while public confidence has steadily declined. The most recent polling reports indicate that 70 percent of respondents believe the U.S. is on the wrong track.
Despite Bush's glib assurances, at the end of last summer cracks in the U.S. economy opened wide enough they could not be ignored. The housing bubble burst and financial markets began to experience a crisis of credit and confidence. Beginning in August, the Federal Reserve Board responded by lowering the discount rate; at the end of the year it was at 4.75 percent. In January, they lowered it by another 1.25 percent. These actions and the comments of Federal Reserve Chair Ben Bernanke indicated Fed concern about slowing economic growth coexisting with rising unemployment and inflation: the dreaded stagflation.
So what's happening? Have we had our fun and now most pay the piper? Is America "goin' down slow?"
Technically, we are not yet in a recession, which is defined as negative economic growth for at least two quarters. The fourth quarter of 2007 saw a decline in the gross domestic product, but the results for the first quarter of 2008 aren't in yet. Nonetheless, most economists feel the economy is in a recession, but differ in their assessment of the severity of the downturn.
We are in the middle of a credit meltdown that will affect every American and make the recession persist well into 2008. The core problem is that America is a debtor nation and most of its citizens are credit "junkies." During the Bush years, the Federal government has consistently run at a deficit and the national debt has increased from less than $6 trillion to in excess of $9.3 trillion. This debtor mentality has infected corporations, municipalities and consumers. While we've been taught our national motto is "In God We Trust," we appear to believe it's actually "Show Me the Money." Money is our premier status symbol, so when we don't have enough we borrow it.
As a consequence, U.S. consumers don't save money over the past eight years our personal savings rate has declined to near zero. We habitually live beyond our means and rely on our credit cards to cover our monthly shortfall the average American household, with at least one credit card, owes $9200 in credit card debt. Americans have blithely assumed the housing market would continue to be robust, credit would stay affordable, and inflation would remain low. Now all three assumptions are doubtful.
In August the housing market began what experts expect to be a prolonged slump. Initially fueled by the collapse of the sub-prime mortgage market, the problems quickly spread. Now we are faced with the worst housing recession in history and 8.8 million households with negative equity. Many experts predict the deterioration of the housing market will have a ripple effect: bankruptcy of developers, huge losses by financial institutions as they write down their loan portfolios, and the resultant fire sale or bankruptcy of large banks and insurers.
While the consequences of the housing recession will affect all aspects of the economy, they will be dramatically impact the American public. Consumers face a stark reality: their wages will remain flat while their expenses increase particularly for housing, healthcare, and fuel. Meanwhile, their home equity has diminished to the point where many of them cannot borrow against it. Therefore, they are forced to further rely on their credit cards. Unfortunately, even though the Federal Reserve Board has lowered the discount rate, credit card rates have stayed the same or, in some cases, actually risen. The reasons aren't hard to understand: banks and other financial institutions are struggling; their earnings have been weakened by bad loans.
The consequences are predictable: public confidence will lower as Americans feel "the good life" slip from their grasp; there will be more foreclosures and bankruptcies; and consumption will weaken. Unfortunately, these realities will infect the entire economy and, as a result, there will be layoffs, business failures, bond defaults, capital reduction, and a liquidity crisis.
America's economic health is failing and we're "goin' down slow." That doesn't mean we won't recover, but it does suggest that for the remainder of 2008 things are going to get worse before they get better.