Thursday, October 30, 2008

An Economic House of Cards Is Falling

Bad news on top of bad news. Today we learn that the economy is shrinking due to consumer cut backs. Not that we can see how patriotic consumption through debt is really a good economic model - none the less it was one we relied upon. This article from the New York Times titled Economy Shrinks as Consumers Cut Back illustrates the current economic problems. Lets take a look -

The Commerce Department reported this morning that consumers sharply cut their spending this summer, causing the United States economy to shrink at annual rate of 0.3 percent. By almost all accounts, the economy is now in recession.

The last quarter in which consumers reduced their spending came in 1991. Since then, neither the recession of 2001 nor the slow income growth of the past seven years has kept households from increasing their consumption. They often relied on debt — in the form of home-equity loans, mortgage refinancings and credit-card loans — to continue spending.

But the housing bust, the resulting credit crunch and the deteriorating job market have forced many people to cut back. Personal consumption fell at an annual rate of 3.1 percent in the third quarter of this year, its biggest drop since 1980, when the economy was in a deep recession.

But the report nonetheless pointed to the serious problems facing the United States economy: consumer spending is falling, and no engine of growth seems likely to replace it the near future.

Consumer spending makes up a little more than two-thirds of economic activity in the United States, more than it did in past decades. The rest is a combination of business spending, government spending and the net difference between exports and imports.

The current model of our economy is propped up by consumer spending. That consumption was only possible through debt. Long term household debt is not sustainable. Like a house of cards, it has come crashing, yes crashing down. The real world pain this model will cause will be long and deep. The pain will be felt by many. Until a new, sustainable paradigm is in place the suffering will remain.

No comments: