Don’t bother crying for help

I was having dinner a few weeks back with an old friend, and the subject turned to the US economic situation. I’ve known this guy for roughly two decades and trust him like a brother; he is a very smart character who doesn’t pull punches. I was inclined to listen – the fact that he analyzes high-yield bonds for a big investment bank’s private client group certainly didn’t hurt his cause either.

I’ve believed that indebtedness at every level of our society, from federal, state and local government, right down to consumers’ credit cards, home equity lines and first mortgages, has reached epic proportions. But when this fellow said he thought we were headed for another depression, my sceptical nature reared its ugly head. I have a predilection for looking at the downside, as I started my career in restructuring situations, but I relish that downside for its opportunity and I also know that nobody likes a doomsayer. It wasn’t until I read about our nation’s savings rate hitting zero that I began to rethink his claim.

Yes, the nation’s savings rate has hit zero, not that anyone should be surprised. We are a consumer society. Our economy is driven by consumer spending. The savings rate has been on decline for some time. And it is now at a level not seen since the Great Depression.

We used to be a manufacturing economy. Then the talk was service economy. Now its consumer economy. What is wrong with this scenario? I heard someone say the other day that the US’s largest export is dollars. With the current account deficit continuing ever upward in mobility, that doesn’t surprise me.

What left me stumped was what anyone can do about it. Seeking bankruptcy protection used to be a way for consumers to clean up their balance sheets, and they have in droves, with the rate of filing more than doubling in the past decade. Many blame skyrocketing health care cost for tipping them over the edge, and I have to agree that a big medical bill can certainly be a “tipping point.” Unfortunately for many, that option is going to disappear very soon. And it is not an option for a global economy like ours.

I’ve also heard chatter about restructuring the tax code to incent savings. I believe that would be a good start, at least for individuals. And rising interest rates are certainly another incentive to save, albeit at the expense of stock market valuations and (potentially) home prices. And there are some economists crying out for accelerated rate increases, and they say that might very well stem the potential of an out and out real estate debacle.

Me…I see a lot of conflicting forces at work. Can you really cut off the finger to save the hand, or are we going to suffer some extreme pain, somewhere, or order to set things right? I simply don’t know, but I would love to hear some ideas.

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