The Republican Philosophy for the Economy: Entering the Alamo?

On June 18, I wrote on the woeful state of the American consumer. Updating that post, I offer the recent numbers from the Federal Reserve indicating that the negative trends cited in my post continue. To wit, consumer credit increased for the seventh consecutive month, a rise of $4.4 billion in May (a 2.4% increase) to a total of $2.17 trillion, spurred by a 9.9 percent gain in non-revolving credit (mostly credit cards) that amounted to an increase of $6.7 billion for the month. Meanwhile, Americans continue to eschew disposable savings, with the personal savings rate furthering its march into negative territory with a -1.7% reading. Simply put, this means that Americans are spending (actually borrowing) 1.7% more than they are earning. Here's a 2006 chart from the St. Louis Federal Reserve illustrating the personal savings rate over the last ten years-- notice any trend?

Since my first post, I've had some pretty smart people tell me that the personal savings rate calculation is misleading in that it does not include money squirreled away in retirement savings (401(k), IRAs, etc.) My retort is that those monies are not liquid-- you cannot access those dollars without penalty in most cases and, even if Americans did, I cannot find much positive in people sapping their retirement savings to pay their credit card bills and mortgages. As to mortgages, homeowners are now using a record percentage (11.4%) of disposable personal income to pay their mortgage obligations.

Ultimately, my point in setting forth these figures is to reflect on the effects stemming from a continuing negative personal savings rate and inevitable washing out of the credit pool, in sequence, leading to a decline in every material economic indicator other than the unemployment and tax rates. To the extent that you believe such a scenario is a bit too nihilistic, you're probably right-- the American consumer, as a class, will survive; albeit paying higher monthly interest charges and, perhaps, draining their savings. Whatever the next point in the cycle though, I would challenge anyone to exhibit an American economic model in which debt-laden consumers continue to spend and borrow in an environment where domestic interest rates are increasing and the world community is tortured by widening political and religious conflict.

Given these delicate economic conditions, it seems odd Republicans are laying the foundation for their mid-term election platform that includes a plank extolling their stewardship of the American economy. While corporations continue to report double-digit returns, the Republican government's greatest economic achievement is celebrating a deficit of $300 billion as a supply-side lesson in practice. Fortunately, not many are fooled. There is, however, at least one idiot arguing that the "White House can now very credibly assert that the deficit will indeed have been halved by the time Bush leaves office." Halved from what? The total deficit equals $1.4 trillion (with actual Congressional deficit spending of $2.2 trillion during the Bush administration) and "cutting that in half" can only be done by producing a surplus of $700 billion. However, as the Washington Post notes, even the administration's recent "midsession review" predicts that "spending will outstrip revenue in every year through 2011 -- the end of the administration's budget window. The administration notes that tax revenue this year is projected to be 18.3 percent of the nation's economic output, just above the 40-year average of 18.2 percent. It is projected to be under that -- averaging 17.9 percent -- from 2007 through 2011." If Republican-controlled Congressional spending continues (and likely increases) in this fashion and the domestic economy suffers from the aforementioned maladies of the American consumer, then "staying the course" with current domestic economic policy is indeed taking the American people into the Alamo: destined for defeat.

As the sun rises on tomorrow's America, we are virtually guaranteed to have a growing deficit, likely to have rising interest rates and metaphysically certain to have a decrease in the aggregate purchasing power of the American consumer. Pile on the ever-increasing rise in the price of crude oil, catalyzed by global turmoil (Gaza, Lebanon, Somalia, Iraq, Iran, North Korea, Afghanistan-- to name a few) and the continuing outsourcing/offshoring of domestic jobs, and it is difficult to imagine a great American economic renaissance anytime in the near future. After the last five years, it seems difficult to imagine a globalized economy prospering in these difficult conditions at any point in the near future, and that does not augur well for the American economy or its globalized supply chains. Maybe alternative energy production is the answer.

If you have a slice of the good life now, I'd recommend that you put part of it in the freezer. It may not taste as good ten years from now, but it'll be better than waiting in line for a slice, or having no slice at all.

Your comments are both welcome and encouraged.