The consumer was fooled by an unsustainable bubble in housing prices and took on way too much debt. HELOCs were foolishly used to finance purchases of autos, electronics, and lavish vacations. Securitization of the debt let the foolish lenders offload these toxic assets onto foolish investors. When the housing market collapsed, it sent a ripple effect through the economy.
The government - led by both parties over the years - has fudged the numbers on GDP, CPI, and unemployment to hide the severity of the problem. Denninger has noted that state sales tax receipts are the most reliable indicator of the health of the economy. The Rockefeller Institute just released the results for the last quarter and they still suck. The consumer still needs to pay down a boatload of debt before they can spend again. Most of the "growth" during the last decade (or two) was really "pulled forward" demand financed with debt. This is not equivalent to growth produced by increased productions.
I suspect that it will take at least a decade for the economy to recover, if it ever does. I fear a "perfect storm" caused by the convergence of profligate government spending and a lower wage base (caused by off-shoring more and more good jobs) is likely to cause an unprecedented crash before a recovery. Both the Bush and Obama administrations as well as most state governments have spending growth at rates far greater than the growth of wages. As Denninger pointed out in today's blog entry, these are two coupled exponential functions that rapidly diverge. The math doesn't lie. The course is unsustainable. The question is not if there will be a crash but when.
Thanks for your analysis. Makes sense.
Well yes, consumer spending is a measure of the speed of money, but, like your point, debt driven consumer spending only works in the near term.
Second, the other point is that goobermint spending (the size of goobermint) is way out of line with the ability of this countries actual production.
Third, our 'leaders' need to admit that all the recent goobermint expansion the last 15 years was based upon a conspired artificially created credit/debt bubble.
The US simply needs to start producing more of what it consumes in order to strengthen it economy and that will not happen until goobermint reduces its spending, corporate taxes and bureaucratic red tape.
The question (the only question) is, what will happen to the parasite class, swollen by decades of bipartisan public policy, when the host dies?
It isn't getting any better. I live in a midwestern city of ~200K. We have one of the best bus systems in the US for a city of our size. Local politicians still want to spend 100's of million dollars of federal money on a light rail system. The idea was killed off during the Bush administration. Now with stimulus money sloshing around, they are back at it again. Since it has been several years, they are starting the process over again. That means new junkets to Europe and Japan on the tax payers dime.