The common thinking is that the immense growth in consumer spending during the past several years was built on easy credit. Data proves this out. What’s interesting is what’s happening, now.
According to Jonathan Miller on his Matrix blog, the following is what’s going on:
According to a recent public policy discussion paper from the Federal Reserve Bank of Boston by Daniel Cooper Impending U.S. Spending Bust? The Role of Housing Wealth as Borrowing Collateral (.pdf)
house values affect consumption by serving as collateral for households to borrow against to smooth their spending….house values, however, have little effect on the expenditures of households who do not need to borrow to finance their consumption.
In other words, the segment of the consumer market that needs to borrow to spend, aren’t spending now. That doesn’t mean “no one is spending” – this is the cause for significant confusion in interpreting the health of our current economy.
Perhaps this is a spin on the “rich get richer” line of thought. Those who could afford to spend their own money during the good times are continuing to spend during the bad. (This is proven every weekend in the South End, where you can’t get a table for dinner without a two-hour wait.)
So, did the US government stimulating spending with over $700 billion help take the place of consumer spending? Perhaps. Now that it’s all been spent (even though there’s still $200 billion more available), will the economy even out or still be begging to be fed? (No pun intended.)
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