Everyone’s talking about it, but will anything come of it? And if so, when?
The Wall Street Journal today weighs in again on the subject of a global economic rebalancing, a topic’s that’s no stranger to these digital pages or any self-respecting economic pessimist. For those who are new to this corner of the dismal science, the basic outline runs thus: the United States spends too much, saves too little, while the rest of the world saves a lot (arguably too much) and spends too little, at least from America’s consumer centric perspective.

It’s been a cozy little relationship, to be sure, with America increasingly turning to foreigners to supply the capital that the U.S. economy can’t. As a result, America has evolved from a creditor nation as recently as 20 years ago to a debtor nation and now owes $2.5 trillion to foreigners, writes David Wessel in today’s Wall Street Journal (subscription required).
The great debate revolves around when America’s red ink will start shrinking rather than growing, and what conditions will accompany that shrinkage. The answer may or may not be imminent, but its arrival will have wide-ranging implications for the dollar, the U.S. and global economies, the financial markets, just to name a few items. Minds differ over whether the rebalancing will enter with a bang (recession, sharp dollar devaluation, etc.) or a whimper (a relatively smooth, painless transition). Step right up and take your choice.
While the world waits for fate to render a verdict, Joe Sixpack and his friends are in no shape to weather a bang. The American Bankers Association yesterday reported that credit-card delinquencies reached a record high in this year’s second quarter. Soaring gas prices are said to be a key reason. But debt is debt, and what it spawns won’t be mitigated because of extraordinary events. In fact, high energy prices may not be so extraordinary going forward, but we digress.
Yet optimism is far from dead. “I’m not sure it’s time to ring the alarm bells just yet,” Travis Plunkett, legislative director for the Consumer Federation of America, tells Reuters today. “Over the last few years, especially since (the) September 11, 2001 (attacks on the United States), consumers have been more cautious in taking on new debt.”
Indeed, as the Reuters story points out, the optimists can point to a recent Federal Reserve survey of the nation’s largest 100 banks to offset the pessimism of the ABA report. The Fed data shows that the consumer card-delinquency rate was recently at just 3.7%, or slightly above a 10-year low.
Regardless of whether Joe’s in over his head with credit card debt, there are other financial demons stalking our hero, courtesy of questions about the recent bull market in real estate. The question here is how much of Joe’s penchant for spending is tied to the dramatic rise in the value of his house of late? A sharp correction in real estate prices could move such a question to the fore in a hurry.
No one knows what’s coming, but we have some clues about what Joe thinks, courtesy of a new survey from RBC Capital Markets, which polled 1,001 consumers this month, reports The Wall Street Journal. Among the findings: homeowners think the value of their houses will keep rising. More than 70% of respondents predicted their homes would rise by more than 10% over the next three years. Meanwhile, more than half said the real estate bull market didn’t affect their spending habits even though over 50% of respondents have tapped equity from their homes via refinancing, home-equity loans or lines of credit. But as the Journal article also points out, that response clashes with Federal Reserve Chairman Alan Greenspan’s recent research, which warns that consumers have become dependent on borrowing against their homes to boost spending. If true, a rise in mortgage rates, which some predict, would threaten consumer spending.
We’ll leave it to readers to decide if Joe’s attitude constitutes a disconnect with the world at large. Meanwhile, in a sign of the times, mortgage lenders are tightening their credit standards and making it harder for consumers to take out real estate loans, reports the ContraCostaTimes.com (free registration required). The market will adjust, no matter what Joe thinks.


  1. John Bott

    It seems that everyone is thinking this ends in a bang. But Macro Blog noted a research paper by Sebastian Edwards that sparked some discussion at Jackson Hole. After reading it, it seems to me that flexible exchange rate regimes go a long ways to smoothing any transition. The Edwards paper has me thinking that this would be a fairly steady reversal over time (despite the size of the current account deficit) and probably won’t hamper growth too much.
    With regard to Joe Sixpack, I was looking at the debt coverage numbers at the Fed website yesterday and late 2001 (sort of an arbitrary starting point for oil’s rally and low rates), debt service has grown at ~6.7% and disposable income has grown around ~6.2% or thereabouts. Looking at it that way, it doesn’t seem like the massive disconnect everyone is talking about. Granted, the consumer will probably be forced to slow down some assuming rates back up a bit and energy stays high, but those two forces should act as a natural stabilizer.
    my $02.

  2. Per

    Adjustments to reality when it comes to financial bubbles are often quite drastic. Probably due to two the human psyche.
    Regarding the US trade defict,the only thing that might create a ‘soft landing’ is, at least according to me, the fact that we are dealing with asian central banks. The dollar would have depriciated long ago if hadnt been for the governments of the exporting asian countries.

  3. calmo

    There’s the UK experience to trot out against the sky-is-falling crowd. Clearly the sky is not falling.
    Sinking maybe. But slowly. Have another beer forchrisake and relax.
    Or did that 6.2% increase in your disposable income rely on your house appreciating?
    Even the Fed knows it didn’t come from your salary/wages, no?
    Have a beer, the natural stabilizer.

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