The Way We Were

Typically while suffering in the midst of a recession , Americans can take solace in the fact that the economy can get out of its funk by going back to doing what it was doing before.  Typically....

The problem for us right now is that we can't go back to what got us in this mess.  Unlike normal cyclical ups and downs, our economy for the last several years has been built on a massive expansion of personal debt.  Worse, that personal debt has now been socialized through government bailouts on the bad real estate loans that were used to finance this asset bubble. 

Economists View has the details:

U.S. Household Deleveraging and Future Consumption Growth, by Reuven Glick and Kevin J. Lansing, FRBSF Economic Letter: U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.

We're all waking up with a hangover promising never to do THAT again which means people are dramatically changing their behavior.  That means saving more, taking on less debt, and in turn, buying much much less.  In a consumer driven economy, that means the economy will not be recovering any time soon.

Sometimes paradigm shifts are painful.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the de-leveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates.

So how will this recovery look?  I think we're seeing the canary in the proverbial coalmine in Starbucks.  Is there a better example of the "spend today worry tomorrow" economy than an empire built on $5 flavored coffees?  Don't get me wrong, I've grown up in Western Washington so I take my espresso intravenously, though I still refuse to forgive Howard Schultz for selling our beloved  Sonics.  But it appears I'm not the only one who has trouble seeing how Starbucks fits into this shift in American spending behavior.

Maybe the worst nightmare is this: What if Starbucks is an artifact of an economy that's not coming back? A time of rising, if fleeting, American affluence as we moved from dot-coms and telecoms, to day trading and house flipping, all based on the biggest run-up of debt in the history of the world. For this venti, triple-shot America, it might have been the quintessential bubble drink.

Here's the part I'm having trouble figuring.  Each time things look bad we have some new whizbang industry to pull us out of our funk.  In the 90's we had the internet.  2000's the financial industry.  What is it going to be this time?  I haven't got a clue and that's frightening.  Worse, our political leadership appears to be so clueless about how to actually help create jobs, that they would rather through billions at a dying company that help support growing companies.

Go figure.