Roach on the Zombie American Consumer and Debt Forgiveness

Stephen Roach has a piece up on Project Syndicate pointing to the astonishing benchmark GDP revisions, which make the weak trend in consumer spending look even weaker. Here is what Roach points to:

As part of the annual reworking of the US National Income and Product Accounts that was released in July 2011, Commerce Department statisticians slashed their earlier estimates of consumer spending. The 14-quarter growth trend from early 2008 to mid-2011 was cut from 0.5% to 0.2%; the bulk of the downward revision was concentrated in the first six quarters of this period – for which the estimate of the annualized consumption decline was doubled, from 1.1% to 2.2%.

I have been tracking these so-called benchmark revisions for about 40 years. This is, by far, one of the most significant I have ever seen. We all knew it was tough for the American consumer – but this revision portrays the crisis-induced cutbacks and subsequent anemic recovery in a much dimmer light…

The reasons behind this are not hard to fathom. By exploiting a record credit bubble to borrow against an unprecedented property bubble, American consumers spent well beyond their means for many years. When both bubbles burst, over-extended US households had no choice but to cut back and rebuild their damaged balance sheets by paying down outsize debt burdens and rebuilding depleted savings.

Yet, on both counts, balance-sheet repair has only just begun. While household-sector debt was pruned to 115% of disposable personal income in early 2011 from the peak of 130% hit in 2007, it remains well in excess of the 75% average of the 1970-2000 period.

If you recall, Roach pointed to this problem in June, saying:

Washington policymakers are doing everything they can to forestall rational economic adjustments. The Federal Reserve has conducted two rounds of quantitative easing in an effort to get consumers to start spending the wealth effects of a policy-induced rebound in equities. Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.

The aim is to get zombie consumers to ignore their festering problems and start spending again – irrespective of the wrenching balance sheet damage they suffered in the “great recession”. The subtext is Washington condones a revival of reckless behaviour.

These efforts have been unsuccessful. And with government stimulus now being withdrawn, we are going to see just how weak consumer spending is. My thesis for the past two years has been that deficit fatigue would eventually cause a retrenchment in government largesse. And when it did the policy-induced economic rebound would wilt and consumer deleveraging would again gather steam. We are nearing that point in the economic cycle now.

Roach posits the following:

What can be done? While measures adapted in the depths of the crisis – massive fiscal and monetary stimuli – were effective in placing a bottom under the free-fall, they have been ineffective in sparking meaningful recovery. That should hardly be surprising in an era of balance-sheet repair.

Instead, the US needs a menu of policies tailored to the needs and pressures bearing down on American consumers. Some possibilities: debt forgiveness to speed up the deleveraging process; creative saving policies that restore financial security to crisis-battered Americans; and, of course, jobs and the income they generate.

I doubt we are going to see wide scale debt forgiveness until defaults and debt deflation have taken center stage. But this is something to consider as it was an approach used during the Great Depression.

Source: One Number Says it All – Stephen Roach, Project Syndicate

14 Comments
  1. Alex Bowles says

    This sounds much-too-much like ‘fundamental change’ for Obama and Geithner to get anywhere near. It’s a shame when you can start measuring the quality of ideas by the speed with which our “leaders” are likely to dismiss them.

    1. David Lazarus says

      I agree. A good way to eliminate debts is allow people to challenge mortgage terms and if found to be odious then allow the debts to be eliminated. If the person has been foreclosed then the home either returned to them or the sum of their original mortgage.

      Also make it much easier for people to clear debts including student debts. The sooner that debts are cleared the sooner people can get back to normal. Let the banks and bond holders face their losses.

  2. Al Broadman says

    This is so much gobbldy-gook written by a so called economist.

    Let me point out the solution the partisan Stephen Roach failed to put into perspective: JOBS. No I’m not talking about the ailing Steve Jobs, I’m talking about the lack of living wage jobs being created in this nation to replace those that have been lost for a variety of reasons.

    Considering jobs data, I’m surprised that consumer spending has not contracted by more than 15% since 2009. And all the above data means is that consumers who do have money to spend are spending almost everything they have rather than saving for future retirement and paying down debt.

    And little of the above data takes into consideration the economic nightmare of the 20-45% of Americans who either do not have access to a living wage job, do not have access to full time work, or are stuck in a career where global free trade has prevented reasonable wage increases equal to inflationary pressures thus decreasing the quality of life of wage earners in a very broad spectrum manner.

    I do understand that Roach is advocating debt forgiveness for those who are over-extended and while that sounds reasonable, it is not really the American way if there are other solutions, of which there is a couple of huge ones staring us in the face.

    One such solution would be to step back from free trade and advocate a “fair trade” concept that protects the third leg of capitalism: wage earners. Tariffs are a great way to equalize the price of products made in low wage countries with those made in first world nations.

    Another solution is to prevent business from replacing workers with automation. While automation tools are a great way to increase productive capacity as well as make industries safer, these technologies tend to push an essential aspect of the capitalistic equation to the side when replacing consumers as laborers with non-consuming robotics. Societies still have to provide for those laborers who have been pushed to the side by the introduction of automation technologies and most have not stepped up to the plate to deal with this problem from a holistic perspective. Companies who for whatever reason choose to use automation technologies will probably need to be taxed in a manner that provides for displaced workers until they can be access to another job that provides at least equal quality of life experience to the one lost. By not doing so we start slipping down a road where anything goes in capitalism and the medium of exchange becomes more important than the individuals who use it for trade.

    In no way should investors become more important than the individuals who actually work for a company in the manner that happened with Sprint workers recently. If your not familiar with the story, Google it. Lots of good fair coverage that to my surprise was sympathetic to organized labors concerns.

    The above suggestions are not going to fix everything overnight. This problem did not occur overnight; but was a result of poor decision making on the part of virtually all aspects of government responsible for oversight and regulation in economic matters.

  3. fresno dan says

    https://research.stlouisfed.org/fred2/series/CMDEBT

    One thing, I guess the debt is shown in nominal terms. It would be interesting to see what the chart looks like in inflation adjusted dollars.
    But bottom line, you only have so much purchasing power in your life (I still expect to win the lottery and increase mine, but you guys are stuck ;)
    Modern business and modern government both believe in modern money management, i.e., how to manage to get all your money. And they have been very successful in making people believe that if you can “make the monthly payment” you should buy the product or pass the law (for tax reductin, wars, etc). Buying things on time – if only I could get a thousand year mortgage…

  4. jack T says

    I went back and reread Jeremy Rifkin’s book – END OF WORK -1996 [?]

    I wanted to revisit his solutions for 3/5ths of humanity becoming redundant in the 21st century.

    Not good.

    He talks about local civil service employing people to make our cities more livable … but no map to how we reorganize our societies.

    Also.. 3/5ths of humanity as redundant is a death sentence for most mammals, fish and air and water.

    Personally? — I want to save Tigers not Indians. Lions not Africans. Let both places rot in their own feces – and leave the place to the large mammals.

    Penicillin and multi nationals corporations… both were lethal to the rest of humanity.

  5. Sandra Williams says

    There is 1 reason for historically low consumer spending–wages stagnant since 1972, 39 years behind prices inflation! People cannot afford to purchase anything beyond the essentials. The U.S. has the LOWEST INEQUALITY in the industrialized world vs. the early 1960’s when the U.S. was #1 in equality, education, unemployment; even 80% of the population owned homes! Why the average wage drop and not keeping up with a living wage (approx. $100K today)? President Carter and Mr. Volcker had a mandate from above to reduce inflation, specifically WAGE INFLATION. They removed annual productivity gains from the annual wage increase/decrease formulas. Workers always received wage increases based on productivity gains. They also saw wages rise during “boom/bubble” periods since the revolutionary war with the exception of the 2000 to 2007 Bush II bubble. So the productivity rate gets cast in stone in 1972 and never changes or is a factor in your annual raise for 39 yrs. despite the fact that productivity has more than tripled. Where did that money go? To the highest paid CEOs in the world with wage increases of over 400% during the same 39-yr. period. So who has the money to spend? The upper 1 percent of course since their wages + bonuses have almost reached heaven while 98% of the population are trying to survive in 1972 wages along with paying the highest health care costs due to salaries reaching hell. Think how much more money people have to spend in other industrialized countries with higher wages (we’re at the bottom, hell) single payer health care, paid sick days, paid 3-wk. vacations and 1/2 of company boards consisting of workers (Germany)? Germany didn’t globalize their manufacturing like the U.S. did, and they can pay their workers living wages. Why not the U.S.? Greed.

  6. Sandra Williams says

    CORRECTION: There is 1 reason for historically low consumer spending–wages stagnant since 1972, 39 years behind prices inflation! People cannot afford to purchase anything beyond the essentials. The U.S. has the HIGHEST INEQUALITY in the industrialized world vs. the early 1960’s when the U.S. was #1 in equality, education, unemployment; even 80% of the population owned homes! Why the average wage drop and not keeping up with a living wage (approx. $100K today)? President Carter and Mr. Volcker had a mandate from above to reduce inflation, specifically WAGE INFLATION. They removed annual productivity gains from the annual wage increase/decrease formulas. Workers always received wage increases based on productivity gains. They also saw wages rise during “boom/bubble” periods since the revolutionary war with the exception of the 2000 to 2007 Bush II bubble. So the productivity rate gets cast in stone in 1972 and never changes or is a factor in your annual raise for 39 yrs. despite the fact that productivity has more than tripled. Where did that money go? To the highest paid CEOs in the world with wage increases of over 400% during the same 39-yr. period. So who has the money to spend? The upper 1 percent of course since their wages + bonuses have almost reached heaven while 98% of the population are trying to survive in 1972 wages along with paying the highest health care costs due to salaries reaching hell. Think how much more money people have to spend in other industrialized countries with higher wages (we’re at the bottom, hell) single payer health care, paid sick days, paid 3-wk. vacations and 1/2 of company boards consisting of workers (Germany)? Germany didn’t globalize their manufacturing like the U.S. did, and they can pay their workers living wages. Why not the U.S.? Greed.

    1. David Lazarus says

      Don’t forget that families in the seventies could survive on one wage, now it needs two wages just to make ends meet. Long term the US is heading for complete meltdown because the majority are still too poor to cope and the tax burden is being passed to them via indirect taxes which are highly regressive. America is its own worst enemy. The obsession with cheap oil has meant that they have to have troops all over the world to secure those supplies. I heard recently that if Saudi Arabia admitted that they have no spare capacity to expand production and that they had even peaked in terms of production that oil would rocket closer to $200 a barrel. That would send the US into a recession.

      During the last oil spikes Europe and Japan with its high gasoline taxes was much more resilient to the spike, yet the US suffered far more. With auto buyers looking at foreign brands which are far more fuel efficient. It was not until the prices fell again did sales of SUVs recover in the US.

  7. alis says

    Is it possible that the reason there is little debt forgiveness and strict conditions for bankruptcy is that all debt decreases mean losses for the holders of the corresponding assets? The official policy seems to be to favor the haves, not the have-nots.

    1. Edward Harrison says

      That is exactly it. Present policy shows the creditor bias which is implicit in a panoply of other crisis initiatives. The goal is to get as much principal and interest for creditors.

      1. David Lazarus says

        Yes but it is that sort of attitude that is creating problems for governments all over Europe. Democracy or not if they ignore the masses then the masses will force them out violently if necessary.

  8. cj kramer says

    Our gov/corp system has always pretended to be egalitarian by providing credit to us rather then focusing on how the profit from labor flows. The end result is that a small portion of society has an every growing claim on the future income streams of everyone else. It will be interesting to see how it plays out.

    1. David Lazarus says

      That is why they want the periphery to privatise state assets so that they can get an income from them, and have the option of selling them on. Don’t forget that the governments will lose any tax revenues as they will have ownership transferred to a tax haven. It is a no win situation. Default is the best option for the borrowers. It will impose huge losses on the creditors but that is their problem.

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