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Friday April 10, 2009 - 11:24:52 GMT
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The American Enigma
chief savior for the United States in this economic, financial and
banking crisis, aside from China of course, will be the American
consumer. If United States economic growth is to resume there is no
possible substitute for American consumer spending. It is the average
US family budget that is the ultimate object of all government plans
and business investment.
The chief economic justification for the
Washington stimulus package is that it will replace jobs and income
lost through the destruction of employment and the reduction in
available credit. The vast increase in government debt will be
incurred, economically speaking, to restore part of this vanished
consumption. In theory Federal spending is designed to fill the so
called â€˜output gapâ€™, between the goods and services that the economy
can produce and the amount that is actually being purchased by
However, the government funded jobs in the private
sector and the cash transfer payments will disappear as soon as the
stimulus funds are exhausted. The only permanent jobs stemming from the
stimulus are likely to be the ones in the new and enlarged government
The object of business investment is the
satisfaction of consumer demand. Without a reasonable expectation of
future sales businesses will not invest, they will not increase capital
spending and they will not hire new workers.
The stimulus is intended to support consumer
spending by distributing money to consumers through jobs and transfer
payments. These payments in turn should help business maintain output,
reduce the number of workers fired and interrupt the downward cycle of
falling consumption and redundant workers. But unless the economy
begins to generate jobs, unless consumption rises from current levels,
businesses are unlikely to invest based on the stimulus spending alone.
The question of whether the US economy will return
to growth rates of 3.0% and 4.0% turns on the consumption habits of the
US consumer not on Federal spending. No government, not even one
possessing the worldâ€™s reserve currency, can disburse enough money to
replace the average unremarked consumer. It is the everyday decisions
of American households that matter not the grand schemes of Washington.
The basic assumption of the US government economic
policy is that, as far as the consumer is concerned, nothing has
changed. When credit, jobs and confidence return, then the American
shoppers will resume their old free spending, credit happy ways and the
US economy will boom again. This assumption is necessary to justify the
budget projections of the Obama administration but it imagines that the
average consumer views debt in the same light and with the same
insouciance as the Federal government itself.
The difference in attitude is striking and is
produced by the difference in consequences. For the individual family
debt is a serious matter. Households cannot borrow to fund operating
costs for the simple reason that, beyond a very limited amount backed
by assets, no one will lend them the money. Bankruptcy is a difficult
option; the consequences of economic failure for a family are real and
No so for the American Federal Government.
Washington has advanced so far into profligacy because there have been,
at least so far, no consequences. The markets have not punished the
government with higher rates for its debt, and voters have not punished
the elected officials by removing them from office. Where there are no
consequences for dangerous behavior there will be no change in
The American consumer has undergone a profound
economic shock. Losing oneâ€™s home or job, or watching 20 years of
accumulated wealth halve in a few months are facts. They are the real
consequences of unrestrained consumption and debt and they will impose
powerful limits on consumer spending for years to come.
The danger for the US Government and the dollar is
that the enormous increase in the Federal debt will not produce robust
economic growth within eighteen months; deficit spending cannot
force recovery because its basic economic assumption of the unchanging
American attitude toward debt and consumption is false.
World markets will take a very different view of
US indebtedness and deficit spending in a year and a half if the
American economy is mired in 1.0% growth. The consequences for the US
economy, the Federal Government and the dollar will then become very
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