Consumer spending is responsible for 70% of US economic growth according to an article written by Hale "Bonddad" Stewart, a former Bond Broker, for the Huffington Post dated 26 Feb 2009.
Hale also states that the outstanding Total Household Debt has increased from 47% of GDP in 1981 to 96% of GDP in the third quarter of 2008.
The fact that American Consumers are dangerously over extended on their debt to income ratio is no surprise but to see it represented as 96% of GDP really drives the point home that we are a nation of debtors. Hale states that the ‘possibility that we are at saturation level with household debt is pretty high.’
This problem is compounded by the fact that Consumer Confidence is at an all time low. Consumer assets like homes and 401ks have experienced significant losses. The Government has been unable to thaw the credit markets and many consumers are fearful of losing their jobs, losing their health care, losing their pension, if they have one, and experiencing even greater asset losses.
The normal reaction for American consumers and consumers in other countries who are in the midst of the greatest economic contraction since the Great Depression is to cut their spending. Reduced consumer spending reduces demand. Reduced demand reduces production. Reduced production reduces jobs. Our economy spirals downward and the recession deepens.
It could take at least 6 months before Main St. realizes any benefit from all of the government’s actions to date which, in my opinion, are only bold enough to ‘soften the fall.’ Any discussion of a recovery by Ben Bernanke, Chairman of the Board of Governor’s of the US Federal Reserve, is premature.
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