Read and understand what I am going to tell you and you will know more about what must happen to the American economy than nearly everyone else. I am not giving opinions, just facts and analysis.
For a long time the
From 1997 through 2007 consumer spending rose much faster than GDP and went from 67.0 percent to 71.6 percent of GDP. It was not because Americans were making more money or using their savings. It resulted from easy credit. First it was chiefly through credit cards. Then it was by refinancing home mortgages and through home equity loans; this was possible during a period of rising home values, which itself was driven by making money for mortgages far too easy. More mortgages, more borrowing, more cash, more spending – until the housing bubble burst in the summer of 2007. From 1997 through 2006, Americans withdrew some $9 trillion in cash from the equity stored up in homes, and credit card debt spiked to unprecedented levels. This postponed the inevitable. And along with this manipulated consumer demand and easy credit came incredible overbuilding of houses and all kinds of retail stores, which is why you are now seeing hundreds of Starbucks stores closing as well as the closing of chains like
How did this artificially spiked consumer spending happen despite stagnant incomes and little saving? It was purposefully engineered by the people running and ruining the American economy, like the Federal Reserve, banks, and the home mortgage industry, as well as Congress and the George W. Bush administration. Blame the two-party plutocracy that has served the greedy Upper Class.
Even before the recent rise in unemployment, nearly half of all American households lived from paycheck to paycheck, making them incredibly vulnerable to the current economic meltdown.
Another big factor in nourishing the consumer economy was globalization, which exported manufacturing and jobs from the
The most important lesson from the economic meltdown was that an economy based so much on borrow-based consumer spending is not viable in the long term. This means something must change in a profound way. What can replace consumer spending as the engine of economic growth?
There are two possibilities. One is government. The federal government has accounted for 22 percent of GDP. The other is the business sector (which by difference accounts to less than 8 percent of GDP because of state and local government spending), but not by buying stuff from other countries. Of course, if the government spends money that it must borrow from foreign sources (because there is too little saving in the
Now what? If the big dollar government stimulus spending program is to really benefit the
Meanwhile, American consumers must do permanently what they have begun to do more of in this economic meltdown: save money and borrow much, much less. Live within their means, buy made in
This too is important: Considerable research has shown no correlation whatsoever between personal happiness and fulfillment versus the amount of stuff people buy. Overconsumption does not produce more happiness. So why have Americans become compulsive consumers? They became victims of incessant advertising and marketing that drove them into debt to keep buying what is new, bigger, and better, including far too much unhealthy food that accounts for two-thirds of Americans being obese or overweight. At some level of consciousness Americans may be recognizing that delusional prosperity produces delusional happiness. Pain helps.
It would also help if we did not have many millions of illegal aliens working here but sending large amounts of dollars back to their families in other countries rather than keeping them within the American economy.
And it would surely help if the private sector spread money around more equitably and stopped giving obscene incomes to relatively few greedy people at the top. Consider this: In 2006 over 5.7 million taxpayers with incomes between $15,000 and $20,000 had a total income of $100.5 billion. In comparison, just the 400 top income taxpayers made nearly as much, with a total of $105.3 billion. Economic inequality keeps most people poorer than they should be based on national wealth. For many years you have heard people say that the
Be clear, when people overspend on what they really don't need because of too much credit they can end up not having enough money for necessities, afford health care, or have any financial security for the longer term. Most Americans have been shocked into much more prudent consumer spending. Thus the current meltdown will not likely be reversed by historically high levels of consumer spending. Far too many public and private institutions have failed and there has been far too much criminal corporate behavior and far too much lax government regulation to allow high levels of consumer confidence again. Consumers are not the culprits for prolonged economic calamity, nor will they be the salvation.
Will anything the government does work? Some jobs will be created, home foreclosures curbed, some companies saved, and financial entities made healthier. But replacing unhealthy consumer spending with other spending is much more difficult. This is the change we must wait for and hope for. Until then, millions more Americans and people around the globe will sink into the economic abyss.