Henry Blodget is arguing for a long recession because consumers are currently heavily in debt and they need to get out from under all the debt before they can start spending again:
Unfortunately, at risk of invoking the four most expensive words in the English language, "this time it's different."
Why?
Because the US consumer is finally broke. For thirty years, we piled on debt and then spent almost every new penny we got. This borrowing spree was made possible by a smorgasbord of no-money-down lending products and ever-appreciating asset prices. Unfortunately, the situation has now changed. The lenders who created those products have now been demolished, and asset prices are falling fast. And this is leaving American consumers with no choice but to cut back.
A few exhibits:
US debt has risen from 163% of GDP in 1980 to 346% in 2007. Household debt, a subset of this, has risen from 50% of GDP to 100%. (Please click here if you would like to see charts that illustrate the points I'm making here)
Mish is arguing for The Age of Frugality:
The US has been on a consumption binge of epic proportions all on the misguided belief that real estate prices would keep on rising forever, at a clip of 8% or more a year. No one ever bothered to do the math as to how anyone could possibly afford to pay the projected prices. Real wages were shrinking but somehow everyone could get rich selling houses to each other.
The "Housing Prices Always Go Up" dream has finally crashed on the rocks of reality. However, while the party was still going on, consumers were willing to go deeper and deeper in debt, buying new kitchens, taking expensive vacations, buying boats, buying SUVs "needed" to haul all the junk around they were buying, etc. And as long as home prices kept rising, everyone ignored the debt side of the balance sheet.
Now, the party has ended, and asset prices are crashing but the debt still remains. Consumers are now very concerned (finally), about the debt side of the balance sheet. It is going to take an amazing shift from consumption to savings to pay down that debt. And a secular shift from consumption to saving is now underway. "Cool To Be Frugal" is actually an understatement.
Businessweek had noticed this trend as well:
....People who overconsumed during the past decade are now rejecting extravagant lifestyles. They're spending less, and more wisely. Some are getting their finances in order. Others are fearful of losing their jobs, shocked by investment losses, or hunkering down amid the general uncertainty.
The penny-pinching is already showing up in the numbers; this quarter could mark the first fall in personal consumption in 17 years. And with credit tight and Americans loaded down with $2.6 trillion in personal debt, consumer borrowing dropped in August, the first such contraction since 1991. Menzie D. Chinn, who teaches economics at the University of Wisconsin, figures consumers won't be in a position to spend freely for five years.
Which brings us to what John Maynard Keynes called the paradox of thrift. What's good for the individual, argued the famous economist, can ignite or deepen a recession. But that won't deter the newly thrifty. "I can't help the economy," says Kim Schultz, a resident of hard-hit Avoca, Mich., who with her husband, Jon, owes $40,000 in credit-card debt. "I've got to help myself." On the other hand, this newfound austerity could—emphasis on could—rewire Americans as savers rather than spenders. And that would help put the economy on a sounder footing over the long haul.
I am hardly the only person commenting on the economy who noticed the mammoth amount of household debt reported in the Federal Reserve's Flow of Funds Report. Here's the essential problem. The US savings rate (which is gross income less all possible payments) was about 2% at the beginning of this expansion. According to the Census Bureau real median household income has been stagnant for this expansion. Yet consumer spending has increased. So where did all the new spending money come from? Debt.
So, the question now becomes this:
How will the US economy grow when
1.) 70% of its growth is based on consumer spending, yet
2.) The US consumer is more focused on paying down debt then spending money?
The simple answer is the US consumer must start to see income increases -- something he hasn't seen for over eight years. That's going to take jobs. And it's going to require a combination of two events.
First, the quality of jobs has to increase. That means we have to create high paying jobs which our workforce can perform.
Secondly, we have to create enough jobs to create a labor shortage which will drive-up wages.
However, even if we accomplish these things there is no guarantee people will start spending on things again. Instead they may use the new income to pay down debt. That means Us GDP growth will have to come a bit more from selling things to other countries than buying stuff from them. That means we have to be more export driven -- we need products we can sell to other people in large enough quantities to influence our GDP positively.
