The End of Shopping
By Robert J. Samuelson
Wednesday, April 23, 2008; A21
Transfixed by unruly financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter-century, Americans have been on an unprecedented consumption binge -- for cars, TVs, longer vacations. The consequences have been profound, and the passage to something different may not be an improvement.
It was the ever-expanding stream of consumer spending that pulled the U.S. economy and, to a lesser extent, the global economy forward (imports satisfied much of Americans' frenzied buying). How big was the consumption pull? In 1980, Americans spent 63 percent of national income (gross domestic product) on consumer goods and services. For the past five years, consumer spending equaled 70 percent of GDP. At today's income levels, the difference amounts to an extra $1 trillion annually of spending.
To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as a reliable engine of growth. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Without another source of growth (higher investment, exports?), the economy will slow.
Why did Americans embark on such a tear? In his book "Going Broke," psychologist Stuart Vyse of Connecticut College argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards (1.4 billion at last count) separate the pleasure of buying from the pain of paying. Toll-free catalogue buying, cable shopping channels and Internet purchases don't require even entering a store.
There's something to this. But the recent consumption binge probably has more immediate causes. One was the "wealth effect." Declining inflation in the early 1980s (in 1979, prices rose 13 percent) led to lower interest rates -- and they led to higher stock prices and, later, higher home values. People regarded their newfound wealth as a substitute for annual savings, so they spent more of their annual income or borrowed more, especially against higher home values.
The "life cycle" (a.k.a. demographics) also promoted the shopping extravaganza. People borrow and spend more in their 30s and 40s as they buy homes and raise children. In the 1980s and 1990s, many baby boomers were passing through their peak spending years. That reinforced the wealth effect. Finally, the "democratization of credit" supported the shopping spree. At the end of World War II, it was hard for most Americans to borrow. Since then, mortgages, auto loans and personal credit have been liberalized. By 2004, three-quarters of U.S. households had debt.
All these forces for more debt and spending are now reversing. The stock and real estate "bubbles" have burst. Feeling poorer, people may save more; it's already much harder to borrow against higher home values. Demographics tell the same story. "Life-cycle spending drops among 55- to 64-year-olds" -- they borrow less and their incomes decline -- "and that's where our household growth is now," says Susan Sterne of Economic Analysis Associates.
And credit "democratization"? Well, the message of the subprime-mortgage debacle is that it went too far. Up to a point, the spread of credit was a boon. Homeownership increased; people had more flexibility in planning major purchases. But aggressive -- and often abusive -- marketers peddled credit to people who couldn't handle it. There are no longer large unserved markets of creditworthy consumers. Indeed, many Americans are overextended. In 2007, household debt (including mortgages) totaled $14.4 trillion, or 139 percent of personal disposable income. As recently as 2000, those figures were $7.4 trillion and 103 percent of income.
The resulting retrenchment of consumer spending is already being felt. "Retailing Chains Caught in a Wave of Bankruptcies," said a New York Times headline last week.
What can replace feverish consumer spending as a motor of economic growth? Health care, some say. Health spending will surely increase. But its expansion will simply crowd out other forms of consumer and government spending, because it will be paid for with steeper taxes or insurance premiums. Both erode purchasing power. Higher exports are a more plausible possibility; they, however, depend on how healthy the rest of the world economy remains without the crutch of exporting more to the United States.
But what if nothing takes the place of the debt-driven consumption boom? Its sequel is an extended period of lackluster growth and job creation. Somber thought. The ebbing shopping spree may challenge the next president in ways that none of the candidates has yet contemplated.
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The Bottom Is Up Ahead
By Steven Pearlstein
Wednesday, April 23, 2008; D01
You'd think that Wall Street would be feeling embarrassed and humiliated enough about its own performance that its top executives and strategists would have the good sense not to be out there peddling fresh nonsense about how the credit-market crisis has pretty much played itself out.
Don't be fooled by the latest sucker rally on stock markets or predictions that the "worst may be behind us." The first thing you need to remember is that these guys still don't have a handle on what they're dealing with -- nobody does. And even if they did, we know that when it comes to their own balance sheets, or to the outlook for the markets and the economy or designing a new regulatory framework, they simply cannot be trusted.
To figure out where things are in this crisis, and where they are headed, it's important to understand how we got in this mess. Let me posit two possibilities.
One explanation is that we got here because mortgage bankers and brokers were sleazy, investment bankers were greedy for fees, banks were incompetent, rating agencies were compromised, and regulators either were blinded by deregulatory ideology or chose to look the other way.
Obviously, there is a good deal of truth in all of that. And if you accept that as the basic story, then you might well think that the crisis will be over as soon as the bad loans are acknowledged and written off, the banks are recapitalized, and new rules are put in place to make sure it never happens again.
But what if that isn't the whole story? What if, for the better part of a decade, the United States had been living way beyond its means, consuming more than it produced and investing more than it saved? What if China and Taiwan and Saudi Arabia and even Japan were willing to finance that trade deficit on easy terms because it allowed them to peg their currencies to the dollar in a way that generated higher job creation and economic growth in their home markets? And what if this mutually advantageous imbalance in trade and investment flows wound up creating a huge supply of cheap dollar-denominated credit that virtually invited the bankers and brokers and rating agencies and private-equity firms in U.S. markets to throw caution to the wind and make ill-advised lending and investing decisions?
Not only is this a plausible explanation, but I think it is the underlying story. And if that is the case -- if the story of the credit bubble and its bursting is more fundamentally about macroeconomic imbalances than microeconomic failures -- that has very different implications for where we go from here.
For what it means is that things won't be "fixed" simply by having the financial sector write off its losses and bad loans and promise to do a better job next time with risk management. Rather, it will require a reduction in the overall standard of living in the United States so that the country as a whole begins to live within its means.
What does that mean exactly?
In practical terms, it means that households will have to reduce consumption, increase savings and stop piling up credit card debt or using home equity as an ATM.
It means that the federal government stops running huge operating deficits by raising taxes or dramatically cutting national security and entitlement spending.
It means that the price of homes return to levels that reflect the incomes of the people who live in them, and the price of office buildings and shopping centers reflect the cash flow from tenants.
It means that the price of stocks, bonds, commodity futures and derivatives return to levels that reflect real cash flows and risk-adjusted economic values, not speculative values based on continued availability of cheap and easy money.
Such a broad reduction in wealth and living standards will take many forms. It will come in the form of higher unemployment and stagnant wages and falling income, which take statistical form in slower or even negative economic growth. It will come in the form of inflation and its first cousin, a lower value for the dollar. And it will manifest itself in lower values for pension funds, 401(k) accounts, university endowments and house prices.
You don't have to have a PhD in economics to see that this adjustment is underway. But it would be folly to assume that it is anywhere near completion. After all, it took many years for our collective standard of living to get out so far out of whack, and it's highly unlikely that we are somehow going to reverse things in a couple of quarters. And the bubbles in commodities and commercial real estate are still to pop.
Moreover, at every step along the way, households and companies, lenders and investors, politicians and taxpayers are going to look for ways to delay such painful adjustments or push them off on someone else. We all know that, just as things overshot on the way up, they are likely to overshoot on the way down.
There are no forecasting models I know of that can reliably predict how long all this will take. But simple logic, and our experience with the real estate debacle of the 1990s and the tech bubble of 2000, suggests that the turmoil in financial markets won't be over until the end of 2008, at the earliest. And since there is a lag of at least a year between what happens in financial markets and what happens in the economy, it's unlikely that the economy will bottom out much before the end of 2009. After that, look for another annoyingly slow and "jobless" recovery.
And that's the good scenario -- what happens if there are no nasty surprises.
What is important to keep in mind is that this will be a process of markets correcting for their own excesses and imbalances. Government can take modest steps to control the speed of the adjustment process or distribute the pain in different ways, but trying to prevent it will only make things worse.
- Re: Good articles on the root problem(s) of the U.S. economyposted on 04/23/2008
Regan’s ear started “consuming economy” , from then on, government always encourages people to buy, buy, buy….the America Dream is shopping all time, everything becomes bigger, the car, the house, and body :-)
Now, I hate shopping so much, and try to get rid of things I don’t really need, I hate clutters.
The simpler, the better :-)
- posted on 04/23/2008
If the US consumer economy is dying, then its impact on the financial markets and the rest of the world will be far greater than the housing market alone. First of all it will mean deflation, so your house will be cheaper and cheaper but the mortgage will stay the same, so the hole will be getting bigger and no-one will be able to dig it out.
IMHO, US government will try to revive its consumer economy by printing more money
(which the Fed is already doing) and so everyone will be floated with cash, which of course leads to inflation. But inflation is a much better alternative than deflation.
So in the future, you will be see bigger TV and bigger bodies.
- Re: Good articles on the root problem(s) of the U.S. economyposted on 04/23/2008
萨缪尔森讲的和我想的一样。美国人牛逼多年,没钱借钱也要活得阔气。现在牛逼捅穿的日子到来了。借钱扩大生产不错,借钱扩大消费,试试看能挺几年?这个简单道理从国家到厂商家庭个人都一样。 - posted on 04/23/2008
美国本该在90年代随日本西欧一起衰退的,但信息产业在美国的垄断发展使美国的繁荣持续到了2002年。
2002年后,布什政府庞大的政府支出,使美元顶不住了。这样,世界人民不再买美元甚至卖美元,美元进一步贬值,商品价格上涨。
美国是个人借贷最发达的国家。这实际意味着美国工薪阶层经济安全边际最低。未来相当长的时间,美国经济将好不到哪去。在企业上班的人,将因此面临很大的压力。
西方常常报道中国贫富差距大,从科学的机制的角度分析,美国才是贫富差距最大的国家。
美国庞大的科研支出和军费开支,以前都是靠世界人民购买美元来支持的。而以后,可能没有那么好的日子了。这其实才是美国面临的最大挑战。
根据现行的世界经济规则,人不能流动,资本,资源,技术可流动,拥有13亿人口的中国将会以超出极大多数人想象的速度追赶只有2亿人口的美国。
按我的估计,再过30年,中国一定会与美国平起平坐。美国将不太可能象现在的CNN那样对中国牛B了。
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