Comments on: Don’t Count On U. S. Consumption

By: Brett

Brett — Tue, 17 Mar 2009 00:13:08 +0000

I think the thing people missed was the social feedback, and the culture of debt.

That's a good point, and one that is frequently hinted at but never expressed directly. To put it simply, if every asshole around you is living unsustainably on debt, then you are going to be under direct pressure to do the same to "keep up the joneses". This was helped by the fact that the system was flooding the US with cheap money, and the fact that interest rates were kept low for a long time by Greenspan.

But China, Japan, and Germany may well take major steps towards solving the problems by cultivating their own domestic markets as engines of economic growth.

Well, Japan has been running a trade deficit for the past 2-3 months, so that may be changing. It's hard to do in China's case, since 700 million of their population is still living on $600 (most of which goes into living expenses and savings), and most of the rest are low-income by American standards. Now, Germany, yes.

By: odograph

odograph — Mon, 16 Mar 2009 18:57:01 +0000

I think the thing people missed was the social feedback, and the culture of debt. People bought homes at 4x income and leased their cars at the same time because that's what their neighbors did. It wasn't rational. There were no incentives that made it rational. No leader made it safe or prudent. They did it anyway, because at that moment in time "debt was good." It possibly ties into the idea that debit-crisis depressions can't happen more than once in a lifetime, because once bitten, those folks don't do it again.

By: Dave Schuler

Dave Schuler — Mon, 16 Mar 2009 17:41:29 +0000

This isn't to say that I don't place blame. I do. I blame political leadership both here and in China who created the incentives. I understand that political leaders have incentives of their own but my sympathy with the desire for unlimited power and riches is limited.

By: Dave Schuler

Dave Schuler — Mon, 16 Mar 2009 17:39:22 +0000

When people respond to the incentives that are before them, that's a natural consequence whether it's us or the Chinese. For us to have the same incentives as the Chinese, we'd have to eliminate social insurance, change our healthcare system, funnel all foreign currency through a government-owned bank, and peg our currency to some nonexistent supereconomy, among other impossible and undesireable actions.

Check the timing.

By: odograph

odograph — Mon, 16 Mar 2009 14:22:04 +0000

US debt was a consequence of Asian saving, but I think you take too many people off the hook when you imply it was a natural consequence. The world would look very different if Asians had saved, and we had saved too. Perhaps rates would be low, and real returns would be low (an oversupply of investment capital bidding down rates in safe and staid investments) but we quite probably would have avoided the bubbles. There are some old rules that we brushed aside as no longer applicable: "your age in bonds", "keep six months income in an emergency fund", "buy a house costing 2.5 times household income." It's kind of interesting. I read Bill Gross on investing, a 1998 book, just last year. He got the future totally wrong from a prediction standpoint, but in a way I think he accurately described the world that would have been without the credit bubbles. It would have been his slow-moving Butler Creek.