A History of Amarican Growth

Economist.com

Tuesday July 28th 2009

Dropping the shopping

Can America wean itself off consumption? The first of a series on how the world’s four biggest economies must change to ensure sustainable global growth

"For decades, its growth has been led by consumer spending. Thanks to rising asset prices and ever easier access to credit, Americans went on a seemingly unstoppable spending binge, fuelling the global economy as they bought ever bigger houses and filled them with ever more stuff. Consumer spending and residential investment rose from 67% of GDP in 1980 to 75% in 2007. The household saving rate fell from 10% of disposable income in 1980 to close to zero in 2007; household indebtedness raced from 67% of disposable income to 132%. As Americans spent more than they produced, the country’s current-account balance went from a surplus of 0.4% of GDP in 1980 to a deficit of almost 6% in 2006..."

"Down with Debt"

HBR.org > July–August 2009

Selling to the Debt-Averse Consumer

by Eric Janszen

"...The Federal Reserve wants to reinflate the credit bubble and engineer a return to the old days. But that isn’t possible. When a nation’s businesses and households take on too much debt and the economy stumbles, the cash flow needed for financing dries up, defaults rise, and a vicious cycle of falling incomes, asset prices, and collateral values begins. That cycle ends only when asset prices, debt levels, and incomes get back into balance. Misuse of consumer credit is gone for good..."


"This recession marks the first recorded decline in household debt, ever."

Copyright © 2009 Harvard Business School Publishing Corporation. All rights reserved.

The Modes of Capitalism

Alan Greenspan
Book: The Age of Turbulence

"For twelve generations, capitalism has achieved one advance after another, as standards and quality of living have risen at an unprecedented rate over large parts of the globe. Poverty has been dramatically reduced and life expectancy has more than doubled. The rise in material well-being - a tenfold increase in real per capital income over two centuries - has enabled the earth to support a sixfold increase in population..."

"Competition, capitalism's greatest force, creates anxiety in all of us...fear of job loss..."

"Down deep that is probably the message of capitalism: "create destruction" - the scrapping of old technologies and old ways of doing things for the new - is the only way to increase productivity and therefore the only way to raise average living standards on a sustained basis..."

5 reasons it's too soon to declare the recession over

Posted by: Peter Coy on July 15
From: BusinessWeek

1. UNEMPLOYMENT: Consumers won’t start shopping again in earnest as long as the unemployment rate is at 9.5% and threatening to break into double digits. People who are out of work can’t spend, and people who fear being out of work won’t spend.

Chart: Econoday

Chart: Econoday

2. SPARE CAPACITY: Companies won’t hire or buy equipment as long as they have lots of slack. Today’s industrial production report revealed that the U.S. industrial capacity utilization rate fell in June to 68%, the lowest since recordkeeping began in 1967. World Bank Chief Economist Justin Lin said today in South Africa that unless global overcapacity is reduced, “we will face a deflationary spiral and the crisis will become protracted,” according to Bloomberg.

Chart: Econoday

3. DEBT: As I’ve written, household debt soared from two-thirds of GDP in the early 1990s to 100% at the end of 2008. Simply getting debt back to three-quarters of GDP, the level of 2001, would require paying off 25% of all outstanding household debt, $3.5 trillion worth. Paying down debt gets even harder when GDP is falling—that’s Keynes’s paradox of thrift.

Chart: SeekingAlpha

4. BOND VIGILANTES: If fixed-income investors get nervous that the government’s massive deficit spending will push up inflation, they will sell bonds and drive up interest rates. That would be a huge setback for homebuying, car sales, and other rate-sensitive sectors.

Chart: Econoday

5. DOUBLE DIP: Even if the gross domestic product rises in the current July-September quarter—and it might—output could very well fall again in the fourth as the effects of the stimulus tax cuts begin to fade.

Chart: BBC