Consumer no Saviour of the Economy this Time

Since 1945, the world economy has been carried on the backs of American consumers. First, they spent money they earned during the war years. Then, they spent money they earned in the big boom of the '50s and '60s. And then they spent money they hadn't earned at all. They borrowed from future earnings, by increasing total US debt from just 120% of GDP in the '70s to 370% of GDP in 2007.

In the last 15 years of that period, especially, each time the consumer showed a reluctance to continue spending, the feds rushed in to provide more credit. And during the final five years of the Bubble Era the debt doubled.

Now, the consumer has understood the dangers of carrying debt. He's not going to take on more debt until all the excess debt is paid-off.

Anew, the feds are trying to stimulate the consumer. The Fed's key interest rate is practically at zero. The feds are pumping money into the economy as fast as they can. And they offer up to $4,500 to scrap his old car.

Even with the stimulus spending, and stimulating low interest rates, the consumer is still not willing to add-on more debt. This is just what happened in Japan. The public sector spent; the private sector saved. Net result: an on-again, off-again recession that still continues by now almost for 20 years.

Those are the symptoms of a depression. It's a point where the old economic model no longer works. The old model was a consumer-led economy, in which the consumer would have to spend more money. But the consumer is not earning more money. There are no prospects of earning more at least not with 10% unemployment and a deteriorating economy. Consequently to be able to spend more it implicates to borrowing more. The consumer economy only can grow if more consumer debt is added. And that isn’t likely to happen.

The old economic model is overturned. There is no longer a credit expansion; now there is a credit contraction. The consumers are fed up with debt. They are cutting back on spending and paying off their debt.

That is the reason that this crisis has turned into a depression, and is not a recession anymore. It's a major change of direction that will take years to accomplish. In this environment stimulus is not only useless it even is counterproductive. It delays and cancels out the adjustments that are necessary.

It might be thought that the Cash for Clunkers program is a success, because it encourages consumers to buy. But take away the 'free money' from the feds and there's nothing left. No real increase in demand, just a temporary demand based on a temporary and unsustainable stimulus.

Encouraging people to buy too much was what caused the problem in the first place. Encouraging them to buy more now is not a solution; it's just a continuation of the same flawed policy of stimulating consumer demand, a policy that has been in place for too long.

Governments cannot influence this change in economic direction whether they like it or not.

The consumer's sense of discomfort is shared in executive suites across the country. "Chief Executive Magazine's CEO Index, the nation's only monthly CEO Index, dropped to 63 in July, after showing gradual improvement. All components of the index are down, with Employment Confidence taking the largest hit...

"What's worse is that pessimism over employment is reaching new heights. In accordance to The Bill King Report: “The Employment Confidence Index declined 25 percent with 57 percent of CEOs expecting continued decrease in employment next quarter. Over 95 percent rate the current employment environment as bad—the highest level for 2009. Less than 5 percent think employment conditions are normal and virtually no one (0.4 percent) thinks they are good."

Since the beginning of 2008 about 6.7 million jobs have been lost! And that does not take into account the 150,000 new jobs that are needed each month just to maintain the employment rate because of the increase in population. It took 55 months once the 2001 recession was officially over to get back to the previous employment peak. It is going to take a lot longer this time.

By the middle of next year (2010), jobless number in the US will be close to 8 million jobs, wiping out all the jobs created since the middle of 2004. Unemployment is likely to be more than 10%, if statistics aren’t manipulated.

And as long the jobless rate doesn’t improve no upturn in real wages can be expected, needed for reigniting a new consumer economy, consequently it is going to take much longer than commonly anticipated before this crisis is over. Wisdom is required that governments aren’t following Japan’s recovery attempts, otherwise after even twenty years there won’t be a recovery.