American Economic Outlook, Where we were and Where we are going


The American Consumer

The American economy for the past few year or so has been in a constant post-recession funk. This has been for a number of years, but most economists label this as a post-sub prime mortgage hangover. The American consumer engaged in binge spending into the follow up to the 2008 financial crises, by buying houses they couldn’t afford, cars they couldn’t pay off and mundane things they just didn’t need. Eventually, the American consumer collapsed underneath the huge debt load, resulting in bank losses that eventually led to the 2008 Financial Crises and eventually the bailouts. People call it the Sub-prime mortgage crises, but I think of it as an American Consumer Debt Crises. American consumers ran up so much debt that American households held a whopping cumulative debt of $14.4 trillion in 2007. The reason we have been having so much trouble in the American economy is simply because, we are in too much debt to be spending any more money. In case, you didn’t know, American consumer spending accounts for nearly 70% of the GDP in the US. When you have such a large chunk of the economy that is having such a hard time, then your bound to be in poor shape for a long time.

To combat this crises, American government officials have tried everything in the book, with things such as stimulus, bailouts, tax cuts, interest rate cuts, monetary expansion, etc. But its hard to see any of these things really having any effect on getting Americans to spend more, or American businesses to invest more. Since, businesses are not going to invest and create more supply unless they see demand for that supply. Its simple economics. Our economic woes can be summed up in a simple analogy. For example, if you go out to eat at a restaurant and simply eat to the point of exploding, what going to happen? Eventually your going to put the fork down and completely stop eating. Are you going to start eating again 10 minutes later simply because the restaurant slashes the prices? Most likely not. This is basically what has happened over the course of the past few years, the American consumer had “eaten” to the point of exploding and simply stopped eating. The US government tried everything it could to get the consumer to “eat” again, but nothing would work. So people wonder when are we going to start “eating” again.

There is a simple answer to this question, which is that the only way we are going to start “eating” again is when we have finished digesting the last meal. Similarly, the only way consumers are going to start spending again is when they have finished digesting their debt load; or at least worked it off to the point where they can start start consuming again without getting crushed under another debt burden. So how far have come along in digesting our debt load? Well according to Rick Newman of US News, our household debt load has decreased by 1.5% from $14.4 trillion to $13.9 trillion. While $500 billion might not seem a lot in the big scheme of things, this is still a huge deal. Considering that it’s also the first time the total amount of household debt has gone down since the end of World War II. But this might still not answer the question of when we are going to see the economy picking up again. Many politicians have said that we need to provide more incentives to businesses and cut taxes more across the board. But as long as consumers are not spending, businesses large and small are going to hold onto their money rather than invest it. But like I said earlier, the only way we are going to start “eating” again is when we have finished digesting our last debt load, and as long as we’re still working on our debt load, no amount of tax cuts or stimulus is really going to get consumers to start spending again. The only way, American consumers are going to starts spending again is when they have more money to spend, and the only way they are going to have more money to spend, is when less of their money is going towards servicing debt payments. So it looks likely that we’re just going to have to wait this one out, until we are hungry again.

-Jay Zadey

Rick Newman “How U.S. Consumers Are Conquering Debt”. US News. Retrieved Sept.30,2011
(http://money.usnews.com/money/blogs/flowchart/2011/01/06/how-us-consumers-are-conquering-debt)

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