This op-ed piece from today's New York Times (http://www.nytimes.com/2008/01/21/opinion/21cohen.html?em&ex=1201064400&en=e7f127ada05a9485&ei=5087%0A) explains why it may be far harder for the U. S. economy to dig itself out of the developing recession. As noted in the piece, the country's consumers have out spent their incomes and with the falling real estate market, they can no longer refinance and pull additional equity out of their homes to pay down their consumer debt. Thus, out of control consumer spending that has kept the economy grinding along may be about to hit a brick wall. It is shaping up to be a very nasty situation. Here are some Highlights:
And here we are, with the rainy day our grandparents always droned on about appearing in the form of a deluge, and no savings stashed for it, and President George W. Bush, the debt-spender par excellence, conjuring up a $150-billion stimulus package that evokes the injection of steroids into a prone athlete wrecked by a marathon. This "shot in the arm," as Bush put it, may dampen a little pain. But this patient will be in intensive care for a long time.
As Stephen Roach, the chairman of Morgan Stanley Asia, said to me: "The very low U.S. savings rate, and related huge balance of payments deficit to attract funds from overseas, are not sustainable things." The adjustment is likely to be long and painful. Roach estimated U.S. net national savings at a tiny 1.4 percent of national income and household debt at 133 percent of personal disposable income. That last figure means middle class families are tapping into home equity - borrowing against their homes - to buy their kids socks. And if they can't pay the resulting never-sleeping debt, they lose not a room or two, but the house.
Beneath the staggering U.S. corporate losses - over $100 billion since the credit crisis began - lie the individuals suckered into taking on debts they won't be able to pay, whatever Bush hands back in tax rebates. "The median American family is going into what looks like a recession owing more than 100 percent of its income," Warren said. No wonder Citigroup just set aside $4.1 billion to cover possible defaults on home-equity loans, credit cards and auto loans - shoes that have yet to drop.
I expect the United States to bounce back, but not quickly. The central fact confronting the next president will be the new limits on U.S. power, both military and economic. The central challenge will be the provision of needed reforms, primarily universal health care, that begin to alleviate the financial strains on median American families and allow them to get back to saving rather than leveraging assets in a phony consumption boom.
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