After the binge, the purge

The always excellent Roger Lowenstein has a piece in today’s NYT Magazine about the recent reluctance of the American consumer to spend.

He makes a point that I’d been making and fleshes it out rather well:

American households are rational to cut back on their spending right now, especially while so many of them are deeply in debt and face uncertain job and income prospects in the months, perhaps even years, ahead.

But while individually rational, it makes for a severe economic slump, since consumer spending (or, put differently, goods and services produced for consumers) is two-thirds of GDP.  Unless a new bubble comes along to delude consumers into thinking that their wealth in stocks/housing/other is rising so fast that it’s OK to spend more than their income, then we may not have found the bottom yet.

Consider:  At the peak of the bubble, in 2008, household debt was 136% of income.  After two years of retrenchment, it now stands at . . . 126% of income.  Lowenstein quotes an economist as saying that there is no clear-cut correct debt/income ratio, but it seems fair to say that over 100% is not sustainable.  Lowenstein notes that just getting it back to where it was in the year 2000, at plausible rates of “deleveraging” (paying down debt), would take about five years.  And he might have noted that 2000 was the height of the dot-com bubble; household debt in 2000 was nearly as high as household after-tax income.  People like to pass on something to their children and grandchildren, so the normal debt/income ratio would presumably be well under 100%.  You’d probably have to go back at least 15 years to find a normal, sustainable debt/income ratio.

Lowenstein quotes another economist as saying “deleveraging cycles” typically last about five to seven years.  And today’s debt/income ratio is not typical but is one of the highest on record.

I said before, we’re in a depression.  Still hoping to be proved wrong.

Oh well, at least we’re not in debt to the company store:

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4 Responses to “After the binge, the purge”

  1. Alex Says:

    I’m with you all the way up to the last line; what do you think the banks are?

    (And great Johnny Cash song for this.)

  2. Laurence Says:

    I am afraid that Americans have no idea what is in store for them. As you correclty pointed out, retrenchment to most Americans means only having 2 family cars and waiting until after Christmas to buy the newest Apple gadget. We ain’t seen nothing yet. And let’s not forget that U6, the BLS’s broadest measure of unemployment (which doesn’t conveniently leave out those who have used up all of their unemployment benefits and thus become “discouraged workers” rather than unemployed) stands at 16.5%. And that’s using the rejiggered post-1994 definition. In 1994 LONG TERM discouraged workers were simply dropped out of the U6 calculation. Putting them back in reveals the real unemployment rate of just under 22%

  3. Ranjit Says:

    Larry – Do you have a cite for the unjiggered U-6 unemployment rates? I’d like to see them. I usually report on the BLS’s U-6 unemployment rate each month.

    Alex – Merle Travis’s original of “Sixteen Tons” is even better, IMO.

  4. Laurence Says:

    Check out shadowstats.com. To get the full methodology you have to pay for the subscription service but you can get the idea well enough by poking around the site.

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