Quote:
Originally Posted by Sexxxy Sites
I, personally, do not think that a service/credit based economy can survive in the long run let alone maintain our current status as being the worlds largest economy.
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One thing to keep in mind is that people were increasing their debt as their assets were rising in value. Mistakenly in my opinion though not necessarily irrationally. If consumers were experiencing a true increase in their wealth - through their home values - then it was not irrational nor necessarily even imprudent to increase their debt. Unfortunately most were under the mistaken impression that "real estate never drops in value". This one belief, so prevalent just 5 years ago has caused an immense number of bad decisions.
Let's fast forward to the present though. Not just Americans but most people in the world are now deleveraging their personal balance sheets. Let's look at the American stats though. For the first time in 50 years household debt is shrinking. Not necessarily in the healthiest way but true nonetheless. In the last quarter consumer credit rose at its lowest rate in 16 years. So there is deleveraging going on - some of it intentional, some of it not. As people now realize that their asset prices were inflated they are now making the decision to delever their balance sheets by decreasing their debt relative to their assets. At the same time the personal savings rate has increased from 0% to around 3%. It will quite possibly go higher.
One thing from basic economics is that
savings becomes investment . So when the economy starts to finally recover there will be an acceleration due to savings transmitting into investment.
On top of that there is a lot of pent-up demand. If you look at the
ratio of registered vehicles in the US to sales over time you will see a massive increase to 23.9 years. This would represent the turnover ratio and is clearly unsustainable. As nobel laureate
Krugman has said "at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won?t happen. Even if the desired number of vehicles doesn?t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are so much worse than newer models that they?re worth replacing to get the spiffy new features (obsolescence). As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail."
Then we had yesterday's news that housing starts were falling at such an alarming rate that they will
soon reach zero!. obviously not possible. As the recession drags on people are putting off decisions to purchase a new vehicle that they need. Some people, interested in purchasing their first home, are waiting for prices to stop falling. This is true for all kinds of things such as home improvements, home and auto repairs and so on. The result of very rational uncertainty over their and the economy's prospects. But as true as it always is savings will become investment and combined with pent-up demand will cause economic growth.
I've wandered a bit from your conversation but I thought this was interesting anyway.