Weak consumer spending will last for years
by ilene - August 17th, 2009 11:56 am
This is an excellent overview of our economic situation. Edward goes beyond consumer spending and discusses debt, capacity, a "balance sheet recession," inflation, deflation, retail sales, commercial real estate, government policy, a statistical recovery and the new normal. - Ilene
Weak consumer spending will last for years
Courtesy of Edward Harrison at Credit Writedowns
It has been my thesis for some time that we are seeing a secular change in consumption patterns in the United States. This will have grave implications for a world economy used to seeing the American consumer as an economic growth engine and consumer of first choice. Retail sales in the United States have fallen 10% since peaking in November 2007. Much of this decline represents a permanent fall in consumption by overly indebted American consumers.
Having finally had a chance to dissect the retail sales data from last week, I wanted to show you a few graphs which indicate how much consumption has fallen in the present downturn and what the implication is for the future global economy. But, first, I want to start with a broader discussion as to why the fall in US consumption is a longer-term change and not a cyclical one.
The Balance Sheet Recession
Numerous economies seem on there way to recovery: Germany and France, Singapore, and Hong Kong, to name a few, have all posted positive economic growth. China looks likely to hit its 2009 growth target of 8%. But, the U.S., generally assumed to be a leader in recovery, is looking like a laggard. Mind you, there are other laggards like Spain and Ireland too. Why are these countries lagging? The Balance Sheet Recession.
Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade. He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.
When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt.…