We face two economic problems: credit and spending. Recently everyone has focused on credit. Banks were unwilling to extend credit, to lend, even to their best friends: each other.
It was unfortunate that this was cast as a “Wall Street” problem. Ultimately it’s everyone’s problem. Our economy is based on credit. Employees expect to be paid weekly or monthly, even if their employer’s revenues are seasonal.
Target hires you in October to stock their shelves with Christmas goods that won’t sell until Dec. 20. And Target already paid for all those Christmas goods. All of this happens with credit. Target borrows to pay its suppliers and its employees, knowing December’s revenues will enable them to repay the loan.
Banks that won’t lend even to each other won’t lend to merchants, large or small. Solving the credit crisis was essential.
The current global approach may finally get it right. Time will tell.
But solving the credit crisis doesn’t mean it’s time to exhale. Now we must pivot to the bigger, longer-term problem we face: spending.
We all have jobs because we produce things that other people want to purchase. I produce education. My spouse, a minister, produces spiritual care. And on and on.
Who buys the things we produce? In the United States, consumers — you and me — now purchase over 70 percent of what’s produced. That’s up from about 63 percent a quarter-century ago. Credit made our increased spending possible.
As we increased spending, we stopped saving. For decades, collectively we saved about 8 percent of our disposable income. Since 1985 saving has dropped, nonstop.
Collectively we now save nothing. For everyone who is saving for retirement, someone else is borrowing. We know who we are! Our home-equity lines of credit underwrote trillions of dollars of spending. In 2006, nearly 5 percent of our spending was underwritten by home-equity withdrawals. In 2008, home-equity withdrawals fell to almost zero.
Connect the dots and you get a scary picture. Consumers spent by borrowing against home equity — equity that has shrunk or, in many cases, disappeared. So you and I will cut back on our spending. Lots of people will cut back. And if no one wants to buy what you produce . . .
Oh, and did I mention that what turned the recession of 1929-1930 into a Great Depression was that the bottom fell out of consumer spending?
