Will the Politicians Listen to the People?
My wife an I went out for a Sunday stroll today in Santa Monica. On Montana Avenue, the chic shopping street, every third store is empty with a for lease sign in the window. A year ago our U.S. personal savings rate was almost zero and by next month it will be over 6%. Besides saving more we are beginning to pay down our credit cards. Earlier this year household debt as a percentage of disposable income was 134% up from 68% in the early 1980′s. My Princeton classmate Vince Farrell notes that this is a huge difference.
Disposable personal income is close enough to $11 trillion that we can use that as a number. If household debt were to retreat to, say, 100% of income, it would be a retrenchment of a good bit over $3 trillion. That would be one big bite out of consumer expenditures. I have no idea where this debt to income will or should go. Things tend to revert to the norm over time, and if we were in the 70% range in the 1980′s, I don’t think returning to 100% is a crazy view. If the savings rate were to return to its 70-year average of 9%, that would chip in almost $1 trillion a year.
Vince is saying that the consumer’s reversion to a cosmology of thrift will take $4 trillion out of annual consumption which represent 72% of our GDP. Read more…