Calling All Consumers; Only You Can Save the Economy

Consumer Spending is 70% of GDP. Basically, America has no economy unless the consumer spends. If you read me, you know this irks me to no end as I do not like this house of cards economy based on debt. Nevertheless, this is the economy we have right now and unfortunately spending is slowing as the consumer has run out sources of funds. Technically, the consumer ran out of funds years ago. Real wages have not kept pace with inflation for quite a while now. Discretionary income has been under siege since the turn of the century. For better or for worse, we did not notice too much because 2002 ushered in the era of cheap money.

The fed reduction of the discount rate to a mere 1% and investors looking for a safer bet, after shying away from a deflated stock market due to the technology bust, combined with a whole host of factors to create the perfect storm; the housing boom. Lots of cheap money flooded the market. People afraid of being priced out of the housing market jumped in despite their incomes, speculators helped fuel the flames of demand and the inflation in house prices was a baby boomers dream. We bought, we sold, we invested, we cashed out and we spent and spent and spent. Suddenly we all had a lot to spend and when we spent too much on our credit cards, we rolled it all over into a new mortgage, or tapped more funds through another cash-out refinance, a larger home equity line of credit or a home equity loan. Everyone was on the same page; we all could keep up with the Joneses. And, all of this was a great boost to the economy...until it all crashed, as we all know too well for here we are.

So, where will the debt-laden consumer get the funds to keep spending now that food and energy costs have dramatically increased and many are defaulting on their mortgages and credit cards? Never fear, retailers will always find a way: “No money down, no interest til 2013” and a myriad of other incentives will connive us to keep spending. We have July back to school sales, a full 6 weeks before school starts, enticing us to come in now for school supplies for 5 cents, 25 cents and the like. We have the $2.99 gas for life specials to reel us in to purchase a new car and the free shipping and other perks to keep us buying online. The credit card companies need earnings, American Express’ stock fell today because even the 'premier' credit card borrower is becoming delinquent.

We had one stimulus package, we complied and spent those checks, and now some politicians are calling for another one. After all, the government and its entities have spent billions bailing out the financial institutions when the true economic bailout is aid to the consumer isn’t it. Hmmmmm.