March 7, 2009

PSSSST....OUR ACTUAL DEBT WAS TRIVIAL:

The Biggest Thing to Fear Is Fear: American consumers are in better shape than you think (Zachary Karabell, 3/08/09, NEWSWEEK)

For starters, it's worth noting that unemployment figures always lag behind economic recovery. No one knows how many more jobs will be lost, but even the most pessimistic estimates assume unemployment will top out at 10.5 percent. Let's say it gets worse and goes to 12 percent, which would mean about 5 million more jobs lost. It's a big number, but that is out of a workforce of about 135 million people in a country with 300 million people. Even if 5 percent more will lose their jobs, surveys show that more than 50 percent fear that they will.

The most obvious consequence is that personal savings jumped from under zero in the middle of 2008 to 5 percent in January. People have been socking away money and paying down debt. Outstanding credit-card debt has been decreasing for the past two months at least, and plunging auto sales are partly attributable to the unwillingness of many to incur new auto loans. Consumers are already rebuilding their own balance sheets.

In addition, consumer spending power has been boosted by lower energy prices and zero inflation. And as retail stores across the country slash prices to attract customers and as homes decline in price, every dollar earned can now purchase an ever-larger array of goods and services.

The outlook for consumption going forward is substantially better. Investors and Washington are deeply concerned about a wave of credit-card defaults yet to come, but while those will certainly tick up with unemployment, the vast majority of people remain current on their cards—and on their mortgages. JPMorgan, for instance, recently wrote off $3 billion of its $184 billion in Chase credit-card loans, which is 1.6 percent of its loans. That got all the news, but it's equally true that 98.4 percent of loans are still in good shape.


The crisis is just a reverse bubble. But the world economy requires that we be borrowing, not paying down debt.

Posted by Orrin Judd at March 7, 2009 4:25 PM
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