The Burden of John Q. Consumer

Will America’s success in Iraq translate into economic stability? When looking at what props up the world economy, the answer is clear.
From the June 2003 Trumpet Print Edition

“Shock and awe” was the term bandied around to describe the pace of the Iraq campaign in America’s declared war on terror. But has that stunning victory perpetuated a sense of overconfidence in dealing with other problems? Can we expect similar victories on other fronts—such as in rescuing the U.S. economy?

U.S. Federal Reserve Chairman Alan Greenspan predicted that a swift victory in Iraq would remove a degree of uncertainty surrounding the U.S. economy, thus stimulating growth in U.S. markets and even worldwide. The Economist reported, “A quick victory, no big oil-field fires and the absence of new terrorist attacks have allayed economists’ worst fears. … The doomsday scenario of a global recession triggered by a long and messy war can now be dismissed” (April 12).

Can it?

Even with the quick resolution to this campaign, there is still cause for concern, because generally, “Post-war markets and the economy fare worse,”_according to Investor’s Business Daily. “Recessions followed World War ii as well as the Korean and Vietnam wars. The first Gulf War stands as an exception; a weak expansion began shortly after that war’s conclusion” (April 16).

After this Second Gulf War, stock markets rebounded cautiously throughout the world, but nothing extraordinary has truly set investors’ minds at ease. Businesses are still somewhat shell-shocked after the financial collapse at the beginning of this present decade. It was hoped the dollar would strengthen after the war, but it hasn’t. In fact, it has devalued, particularly against the euro. Foreign investors are still seeking alternative investment opportunities, which further weakens the dollar.

The world’s attention has shifted from political conflict to economic concern. Nearly every nation on Earth is dealing with financial woe.

Global Economy

The combination of the collapse of an overvalued stock market and the timing of al-Qaeda’s terrorist attacks in 2001 jolted the global economy.

In Germany, unemployment currently accounts for 10.6 percent of its potential work force. Many fear Europe’s economy is meandering back toward recession. The European Union’s gross domestic product is projected to grow at a stale 1 percent for 2003. Economists list the short-term outlook as “bleak” for the eurozone.

Although the British economy still remains the most dynamic in the EU, the Bank of England lowered its growth forecast from 3.1 percent to 2.5 percent for 2003—a trend expected to persist through 2004 with further decline to 2 percent growth. The downward forecast is blamed on the sluggish eurozone and faltering consumer spending growth.

In the U.S., businesses and individuals have been hit with dramatic increases in insurance premiums for the past several years. Dips in the stock market and increased natural disasters and terrorist activity have drained capital from the insurance sector of the economy. Some claims have yet to be covered from 9/11, putting a tremendous strain on the reinsurance industry.

The American Consumer

The economy has come to the forefront of our attention. If unsuccessful in the next presidential elections, President Bush could become the first president in history to leave office with America having fewer jobs than when he took office. Over 2.6 million jobs have been lost in the past two years, with 20 percent of those laid off having been out of work for over six months now. A robust economy requires high employment. Without new jobs, it is unrealistic to expect an increase in either consumer confidence or spending. And without increased spending, the economy will not generate new jobs. The vicious cycle perpetuates itself.

Politically, economic issues will most likely decide our next presidential election. Americans, and the world for that matter, are looking for a way out of our present economic quagmire.

It is not a matter of which political party is to blame for our financial troubles. These problems have existed for decades and have grown ever more complex—and the potential increasingly devastating. The truth is, the average American is responsible for much of the trouble we face today.

From the mid-1990s, the global economy has largely been driven by consumer credit in the United States. Since 1995, the U.S. has accounted for two thirds of the world’s economic growth. The overwhelming majority of the U.S. economy is sustained by the average consumer, who shoulders nearly two thirds of the total economic activity for the nation, and provides what little forward momentum the economy now enjoys.

Nearly every nation is relying upon the continued global stimulus of the American consumer. But in these increasingly volatile times, consumer confidence is beginning to wane. High unemployment (6 percent in the U.S.) and declining confidence are eroding the consumer’s ability to sustain such a massive economy. American consumers are increasingly defaulting on payment of their bills. The credit bubble is about to burst! The global economy is teetering on the brink of disaster.

The Consumer-Friendly Decade

How did the world economy become propped up on as weak a foundation as the confidence of the American consumer?

It began in the 1990s when an unprecedented pool of credit and low interest rates became available. Creditors were eager to issue new loans or extend credit to individuals who previously might not have qualified. Consumers took advantage of low interest rates to buy houses, cars and other major purchases. That borrowing binge propped up the economy.

The average American consumer fell into the trap of spending more than he or she had to spend. By March this year, Americans held a collective credit card debt of $721 billion.

On top of this, at the end of the ’90s, personal savings plunged to an all-time low. “America’s private sector was a net saver for 40 years until 1997: The total income of households and firms always exceeded their spending, with average net saving of 2.6 percent of gdp. But the irrational exuberance of the late 1990s encouraged a massive boom in spending and borrowing, pushing the private sector into a deficit of 5.2 percent of gdp by 2000 …” (Economist, March 15).

Many are not adjusting to economic reality and are still actively borrowing against the equity in their homes for purchases they can’t afford. A crisis could rapidly develop if conditions changed. “If house prices were to wobble, the outlook would be far worse. An analysis in the World Economic Outlook points out that 40 percent of house-price booms are followed by busts, and that these busts cause twice as much economic damage as stock market collapses” (Economist, April 12).

Americans seem to have an insatiable appetite and tolerance for debt—greater than that of any other nation. But how long can the American consumer carry the economic activity of the world?

Time to Pay

The present, unprecedented state of economic affairs in the lives of individuals and nations indicates that our day of reckoning is almost here.

“World economic growth this year will be modest at best and will be driven—yet again—by the engine of America. While helpful in the short term, this continued reliance on America is perhaps the biggest reason to fret. For it means that the American current-account deficit, already above 5 percent of gdp, will rise. A deficit of 7-8 percent of gdp within the next few years no longer looks outlandish.

An external deficit on that scale is not sustainable. Yet no other economic area looks capable of taking over from America as an engine of global growth. Until that changes, any reduction in America’s deficit will spell a weaker world economy. Long after the war has ended, that threat will lurk in the background” (Economist, April 12). That is the unsolvable dilemma we have gotten ourselves into: Mounting debt simply cannot be sustained—yet if Americans begin behaving responsibly, the whole house of cards will tumble.

In December of last year, U.S. retail sales were flat (excluding automobile sales), below the forecasted growth of 0.3 percent, according to the U.S. Commerce Department. “Some economists think these are signs that consumers—whose spending fuels more than two thirds of the total economy—have finally had enough, that two years of a lousy stock market, job cuts and rising debts are finally taking their toll,” wrote Mark Gongloff for cnn/Money.

Could it be that when consumer confidence dwindles, the entire economy will come crashing down? Since consumer spending accounts for more than two thirds of the total U.S. economy, one would certainly think so! We can keep burying our heads in the sand, but the bankruptcy of the world’s once-wealthiest nation is coming. It is impossible to sustain indefinitely a situation where a nation’s population carries a $34,500 per capita debt.

Global economic conditions will remain volatile. With consumer spending outstripping income, the cycle can only run for a limited time. The gluttony of the 1990s pumped incredible growth into the world economy, but it is now time to pay the bill. Stand by for a global economic explosion of historic proportions when the credit bubble finally bursts!