Friday, February 29, 2008



Mark Gongloff makes some insightful points in his “Ahead of the Tape” column on page C1 of today’s Wall Street Journal, but he misses the magnitude, and some key aspects, of the problem he is describing.

Mr. Gongloff writes:

Adjusted for inflation, after-tax incomes have contacted in two of the past three quarters. To keep spending, households have effectively stopped saving. Many were happy to do that during the housing boom. It was easy to borrow against their appreciating homes instead. Now that credit is tight and home equity is evaporating, plain old income will become much more important.” (Emphasis mine)

He concludes his article with:

“With credit tight now and households in need of building up their savings, a deeper spending slowdown could be on the way this time.” (Emphasis mine)

There is very little with which to argue in Mr. Gongloff’s article, except….

First, households’ ceasing saving is not something that has happened over the last three quarters or so. Americans stopped saving years ago; the savings rate has flitted back and forth between negative and positive readings for years before seemingly getting stuck in negative readings over the last few years. We have become such prodigious spenders that the entire world economic system (described, perhaps neither ironically nor coincidentally in an article by Mr. Gongloff’s colleague, Scott Patterson, that immediately follows Mr. Gongloff’s article) depends not on Americans’ spending all of their income, but on American’s spending more than all of their income.

Second, Americans will no longer spend more than they make not because they are in need of building up their savings; they have been in need of building up their savings for at least the last ten years. Americans will no longer spend more than they make simply because they can’t, largely due to the reluctance of foreigners’ to continue to finance our prodigious spending, as described by Mr. Patterson.

Americans’ inability to borrow money coupled with weakening household incomes in the U.S. will lead to a more dramatic cutback in spending than most people, and certainly most “experts,” anticipate. In the long run, this could be a good thing if Americans rediscover the virtue of saving, a virtue with which their (in some cases) parents and grandparents seemingly were born and thus had no need of learning or discovering. In the short run, however, the consequences for the world economic system, built around Americans’ profligacy and the world’s willingness to finance that profligacy, will be dire.

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