Here's the deal: for about 15 to 20 years we've been living beyond our means, borrowing too much. Every possible statistic on borrowing trends tells the tale.
Now that trend has reversed itself, and we are making up for lost time. That means the savings rate could leap from basically zero to 10% of income.
Spending is falling at a pace not seen since, well, you know how this sentence ends.
Why is that a problem?
As the economy deleverages and the Great Unwind gathers momentum -- see my blog post for more on what this means -- spending is collapsing.
The only entity that can fill the hole is the federal government. Mark Zandi thinks the $825 billion package now in the works is too small to plug the hole. So do the economists at Goldman Sachs and many other top economist share that view.
Obama's Treasury-Secretary-designate told Senators the lesson of financial crises is that governments do too little and are too cautious.
I pressed congressional leaders on this topic after they left their meeting with President Obama. None of them seemed to think a bigger package was in order.
Are we repeating the mistakes of the past now?
Comments
I am retired with good social security and a federal pension. I think I am economically secure. My theory is that people like me should spend more than we usually do. People who are teetering economically have to try to save.
This does nof help much but it might help a little.
My philosophy with respect to inheritances is to give to the grown children now. This is especially relevant in today's climate. They know how to spend, whereas I am not inclined to spend unless I really need the item.