The American Consumer: A Real Weapon of Mass Destruction

Whilst the debate gets underway on whether you support the troops, the mission, or both the troops and the mission, I'm hoping that someone will address an immediate threat to our future: the sorry state and perilous path of the American consumer.

Articles citing disturbing short-term trends in the economy are aplenty and many speculate on an impending recession spurred by declining asset prices, yet there is very little commentary from politicians or the daily media on how the economy will be affected by the current (and worsening) state of the debt-laden American consumer. As explained below, a continuing deterioration in the short-term health of the American consumer will dramatically affect the economy. In the long-term, a significant decrease in the borrowing and spending by American consumers may either induce or further accelerate a recession or perhaps depression.

To begin with, we must first understand the significance of the American consumer to the American economy. Approximately two-thirds of all economic activity in the United States is undertaken by the individual consumer-- you, me and the three hundred million other Americans. As a unit, we are the single fiercest economic force this plant has ever seen. However, as discussed below, our purchasing power has been waning and our debts have been mounting. Still, the American consumer forges on, emboldened by the incessant siren's song streaming from every imaginable commercial concern.

"The More You Buy, the More You Save!"

I heard that bit of American commercial wisdom in a radio advertisement. Probably wouldn't have worked quite as well on television-- can you imagine the facial contortions necessary to turn that phrase? The more I buy, the more I save? Does that also mean the less I buy, the less I save? What if I don't buy anything? I don't save anything?

What's plainly clear to me is that if I don't buy anything, I save what I already possess. However simple it seems to comprehend, the logic of that formulation seems to be lost on many Americans. How warped our little minds must be to equate saving with consuming. However, Americans as a whole are doing exactly that: spending more than we are saving (if we are saving at all). It's been widely reported that in June 2005 the Bureau of Labor Statistics issued a report indicating the personal savings rate (roughly the percentage of total dollars spent over total dollars earned) of Americans had become negative. This was the first time that the indicator had reached negative territory since the Great Depression, and it has remained negative for the last eleven months, dropping to its lowest level of -1.6% in April 2006, the most recent report released. The report for May will be released on June 30. Check back for an update. [Update: May personal savings rate: -1.7%]

While the declining personal savings rate is surely a cause for concern, the indicator will inevitably be corrected through the washing out of the credit pool. Those with the means will begin saving more as interest rates increase and the once-meteoric rise in asset prices continues to taper off. However, there will also be a significant number of defaults, foreclosures and bankruptcies. Consumers who are "leveraged 'till doomsday" will begin seeking those remedies in greater numbers as the Federal Reserve continues to raise the base interest rate to 5.25% and perhaps beyond. Oddly enough, total consumer credit in this country, estimated by the Federal Reserve to have currently reached a record $2.17 trillion, rose by 5.9% in April! [Update: The Fed said May's 2.4% increase in consumer credit followed a huge 5.2% rise in April. The slowdown occurred because of weakness in auto loans, which offset the jump in credit card borrowing. Borrowing on credit cards and other categories of revolving debt shot up at an annual rate of 9.9% in May, the biggest surge in this category since a 13.5% increase in October 2004.]

It's also estimated that American households on average carried $9,312 in credit card debt in 2004, the latest year for which statistics are available. Many of the rates for credit cards are keyed the rising base rate, and as the base right rises, so to will the APR on credit cards and adjustable rate mortgages (where default rates are rising dramatically). Given the recent "advances" in personal bankruptcy law, those Americans who do seek bankruptcy protection to prevent foreclosure will effectively be shut out of the financial system for at least the length of their repayment plan and likely longer. Debt slaves don't make good consumers.

Perhaps Bush and his "braintrust" could get something right and convince us that paying our credit card bills helps fight terrorism. However, given the deficit Bush has run up with the public's credit card, it's unlikely that even his whizbang team of spinners could put a shine on that pile. To the extent that consumers do begin to pull back their spending or consumer credit defaults, the Democrats would be wise to shift the debate to the sagging economy. While Democrats do not have a particularly shining economic record historically, they have never spent money as recklessly and partisan as the current administration, both domestically and internationally. As Bush and his cronies are so fond of saying, "9/11 changed everything." Apparently that includes Republicans, who appear to now support big government and a gross lack of fiscal discipline, including a national debt of $8.3 trillion.

Unfortunately, some "fool" is still arguing that old chestnut that deficits don't matter-- that's not the issue. The issue is that the deficit is growing unnecessarily in a time when the overall economy is stumbling and its main engine, the consumer, is drowning in an ocean of personal debt. In this environment, it is deplorable that the Bush administration is spending untold billions in its pseudowars and squandering billions more domestically with poor oversight while the Republican Congress approves outright pork projects.

Ultimately, for the personal savings rate to increase, the amount of money in the economic cycle must decrease. A decrease in the amount of capital circulating in the economy means a slowdown in economic activity and a concomitant decrease in production. If that slowdown in production lasts long enough, then you've seen a recession, and if it lasts longer, a depression. Commentators are just getting started on whether there will be a recession, though it is now clear that the likelihood of such an economic decline is no longer considered remote.

At a minimum, the writing is on the wall for at least a temporary pullback in consumer spending, which hopefully shows up in the personal savings rate report for May. The longer the indicator remains negative, the deeper the hole becomes and the longer the recession or depression will endure while consumers struggle under mountains of debt. A prolonged depression would also affect the increasingly global economy and may allow emerging powerhouses like China and India to capture further gains in global market share. The potential implosion of the American consumer is a real threat, and if that implosion occurs during a downturn in the business cycle, the economic effects would be similar to the detonation of a real weapon of mass destruction at Wall and Broad streets. Such an implosion would significantly depress or even eliminate growth in the American economy for the next several years.