America's over-reliance on consumer spending helped create the mess we are in. To finance our spendthrift ways, we borrowed more than we could afford. We also saved less than necessary and bet that rising home and stock prices would make up the difference. In addition, our willingness to consume more than we produce led to unhealthy imbalances with nations like China.
Well, guess what? The latest data reveals that America is more dependent on the consumer than ever.
Last Thursday, the Commerce Department's Bureau of Economic Analysis (BEA) revealed that personal spending in August rose 0.9 percent, its biggest monthly jump since 2001. Reports suggest the increase stemmed from stepped-up purchases of durable goods like cars, aided by Washington's cash-for-clunkers scheme, as well as aggressive back-to-school promotions by nervous retailers.
The BEA also announced that personal income -- the sum received from all sources, including wages, government transfer payments, and interest -- rose a more subdued 0.2 percent. While the result beat Wall Street's expectations, the gap between the two data points helped to highlight an unsettling development.
More specifically, the relationship between the two has diverged to the point where personal spending is now at a record high relative to income, surpassing the level seen at the pre-financial crisis peak of housing bubble-induced euphoria.
Other data paints a similarly troubling picture. Personal consumption relative to gross domestic product (GDP), the sum total of U.S.-produced goods and services, has also hit a record. Based on estimated data for third quarter GDP, the consumer now accounts for around 72 percent of output, a far cry from the 50-year median of 64.5 percent.
That might not be so bad if the consumer was in better shape than he (or she) was in the past, but various data indicate that is not the case. For example, although household debt relative to net worth is marginally below the second quarter record of 26.9 percent, it is still two-thirds higher than its long-term average.
Another series also shows that households remain stretched, despite some improvement from the record highs seen in the spring of 2008. According to the Federal Reserve, Americans devoted just over 18 percent of their monthly disposable personal income -- the amount left over after income taxes -- to debt, auto lease, rental, homeowners' insurance, and property tax payments in the second quarter.
Aside from the fact that the median average of the Financial Obligations Ratio (FOR) since 1980, when the Fed started keeping tabs on it, is 17.3 percent, or less than we have now, the current measure is above the range that prevailed prior to the accelerated lift-off in housing prices following the 2001 recession.
And while the personal savings rate is no longer scraping along at the unsustainably low levels we saw in the middle of the current decade, at 3 percent it is still less than half of its long-term median and well below the more "normal" levels of 8-10 percent that were commonplace since the Great Depression.
It doesn't help, of course, that severe declines in stock prices and property values have undermined what economists refer to as "the wealth effect," which helped power a measure of past spending. The fact that American's net worth relative to GDP has fallen back to more normal levels while debt loads have remained high is not at all reassuring.
This doesn't even take account of other developments that suggest the health of the consumer is seriously at risk. Along with data released this past week, which revealed that a growing number of Americans are losing their jobs, being forced into foreclosure, and filing for bankruptcy, recent research also highlights the fact that income inequality has hit an all-time high.
In the end, none of this bodes well for an economy whose fortunes are (still) so closely tied to the spendthrift ways of the U.S. consumer. In fact, once the man in the street figures out that, despite the sorry state of his finances, he is the one that is being counted on to rescue the economy, that's when the real trouble will begin.
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http://www.youtube.com/watch?v=9QpD64GUoXw
When products cease to have value and are made to break before you use them, the mystique tends to degrade.
And when "getting more" becomes the god-like American Psycho goal, well, implosion is inevitable.
Moreover, people eventually start to subconsciously equate theft and evil with shopping after they have been reamed by Industry, Government and Media enough times, and watch bailouts go shopping with THEIR tax money.
Cause of depression:
1) Failure of globalization based on unbalanced trade. (Obama, Bush1 2, Clinton, REAGAN)
2) Failure of bank regulation after respective laws were repealed (Clinton, Carter, Bush)
3) Bailout of corrupt institutions which further depressed the honest ones. (Bush, Obama)
What the government should do, in that order:
* Financial reform: return Glass-Steagall, tax derivatives, etc (Obama is against it).
* Balance the trade - many ways to do it (Obama is against it).
* Control HC cost: Single payer or expanded Medicare for all (Obama is against it).
* Stop the wars (can be first, Obama is out of the loop)
* Gradually balance the federal budget (Obama: 2 TRILLION deficit this year)
* Reduce red tape and monopolization in the economy (Obama, Congress: not even a whisper )
Everything else is more of the same and the camel's back is about to break.
The largest problem though is corruption and it's the responsibility of the public to solve it. The government has become corrupt along with many large private
institutions. The checks and balances have been overwhelmed by corporate corruption. Getting rid of corruption is everyone's duty. Criticize both sides, remove
corporate personhood, reform campaign finance and lobbying. Keep corporate money and jobs away from elected officials. Lots of work for activists...
While too early to be certain, much data suggests that consumption habits have changed radically and that such change will last for an indefinite period.
Large retailers are overbuilt, over-leveraged and less utilized. Their profit margins are razor thin if not negative as they try to wait out the storm and survive as others fail.
I suspect that the coming few years will find many, many big empty boxes that will remain empty until they decay and crumble. Interesting times ahead...
we produce less but consume more
we function as the worlds consumer
the problem is that these lower paying service jobs
people can't buy as much on a service sector salary
we used to have higher payig manufacturing jobs.
at one time, we actually used to make things.
add to that the fact that we have been living beyond our means and you've got trouble.
I think this also means that consumer spending is already maximized and is never going to stimulate the economy despite the claims that the recession is over.
We needed to Nationalize these major banks and use the banks and banking system to Stimulate the Economy...
What has happened in the last 20 years is that big business and banking determined that they would do better pushing cheap credit (like a drug) rather than by raising payroll. It was a gravy train! Then they figured out that they could charge any amount of interest they wanted and soak us for all kinds of fees. Money, money, money!
Unfortunately for us, they then gambled it all away and we're left holding the bag.
And they still don't recognize that we're the ones that have always kept the economy running — they're already gambling again.
http://www.ibtimes.com/articles/20090907/citigroup-2006-americamodern-day-plutonomy.htm
Those of us that don't matter might stop purchasing/curtail our spending to emergency purchases only for a week or better yet a month to see how the rest of us don't matter.
Offshoring and underemployment deprives people of the ability to pay back any loans. It also reduces incentive for going back for more education, if the living-wage jobs that college degrees (used to) command won't be there.
Cost of living isn't going down to match the wages (oh, read the article where the journalist says $11.75/hr is great as she got that when she was hired in 1979. Of course, they don't say what the costs of living then compared to now... (minimum wage under $3, bread $00.60 or so, gas $1.10)
The last 30 years have shown stagnant or declining wages.
http://money.cnn.com/2009/09/21/news/economy/detroit_fixers_pasky/
(1979 wage reference)
http://kclibrary.lonestar.edu/decade70.html
http://kclibrary.lonestar.edu/decade80.html
(most of cost of living references)
http://www.memorial69.com/class_custom6.cfm
(more references, though not pertaining to 1979, but if people know how to do math, the imbalance between the ratio of cost-of-living to minimum-wage is sad enough to begin with...)
In short, and there's a lot more detail from EVERY perspective, but it's not as simple or as one-track as "consumers are to blame because they spent too much and if they don't spend they'll be to blame again."
Don't give the Democrats a free ride, they are just as fiscally irresponsible as the Republicans. Obama has the largest defense budget of any president in the histroy of the world. He is most likely going to have increased the deficit by more than any other leader in his first term alone.
The US today is saddled by payments to bankers based on inflated real estate prices that have collapsed up to 60% in some places. Weimar Germany had to pay reparations for WW I that forced their economy into harsh realities and an extreme right wing solution. The key is to force accountability and reform immediately before the proof comes in the form of a breakdown collapse from which there is no return. Bondholders will have to take a haircut, as equity and real estate have done. Derivatives need to be liquidated, regulated and, in many cases, outlawed.
The creditors were bailed out from their own follies based on poor lending standards but consumers took a major hit from which they will not recover. Predatory lending came back to bite them from behind, but taxpayers and consumers took the fall.
"We have the worse situation in seventy years in this country. Any futher blowout will probably take down the system. That collapse could be worldwide and lead to wars".
And recently we have seen bizzare displays of some americans wanting this president to fail. There are a variety of blowouts that could take down the system.