Page 41 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

■ THE OVERSTRETCHED CONSUMER ■

Ultimately, the most pressing problem for banks, and the world
economy as a whole, is the deteriorating left side of their bal-
ance sheets—the overleveraged consumer.
Indeed, the backdrop to the Great Recession is an enormous
increase in long-term consumer indebtedness not only in the
United States but also in several European countries, including
the United Kingdom and Spain. Curbing the debt-fueled
growth will have a significant impact on economic prospects
worldwide. With consumers overburdened with debt and suf-
fering from declining home and investment values, many have
no capacity to borrow. And even if they do have some borrow-
ing capacity left, looming job insecurity (witness the steep
increase in unemployment) and deflating asset prices will make
them less willing to do so. Even in the best-case scenario (with
job-creation rates equivalent to the 1990s’ boom—something
that we feel is very unlikely), it could take until 2014 for unem-
ployment to return to 5 percent in the United States.
The most important consumer in the world is the U.S. con-
sumer. To prove it, simply do the math. Consumption has
accounted for 70 percent of the U.S. GDP in recent years. The
U.S. economy represented 26.8 percent of the world economy
in 2008 and 27.1 percent in 2007. This means that the U.S.
consumer is responsible for 18.8 percent of world GDP.
And this is only the direct effect of their consumption. The
indirect effect—the so-called multiplier—takes their contribu-
tion even higher. Consider the case of toys made in China on
German machinery and transported around the world by
Japanese trucks and Korean ships. A drop in demand from the
U.S. consumer has a significant impact not only on the U.S.

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