Friday, September 9, 2011

Consumer Confidance

Jacques is nothing if not confidant.  He seems always confidant he can take on another dog in a fight, always confidant that I will re-fill his food bowl, and always confidant that when I come in the front door it is because I want to play with HIM.  Perhaps his overwhelming confidence that I will continue to feed him and give him treats is why he never saves for later.  This is also exactly how consumer confidence works.  If consumers are confidant, they spend, if they're less confidant, they save, which is why when a pundit on NPR not long ago said this: "the economy needs consumer confidence to come back, it will recover when consumers start spending again," I asked myself "spending what money?"

It is not a psychological quirk that is making the average consumer try their best to spend less than they earn (my explanation of what impact that has here, Krugman's careful model of how that works in this paper), they are trying to save money because their combination of debt, assets and rational economic outlook make saving the only sane choice.

With the economy the way it is, asking people to spend instead of save, that is asking to take on yet more debt, is both impractical, and more importantly a really bad idea. Remember that the economy took a dive because people realized all at once that consumers had too much debt, and couldn't repay all of it. Asking them to shut their eyes, pretend like they didn't realize that, and pull out their credit cards would only set us up for another 2008. This recession will get better when there is a way for the private sector to get out of debt, whether it is through inflation that makes the debt worth less, default in which the creditors just get hosed, or through expansionary fiscal policy in which the government borrows so the private sector can save, giving us new infrastructure ad a side effect.

Until that happens, I only foresee more malaise, and my biggest fear for the economy is that, like Japan, the whole world will see a "lost decade" that could well drag on for 20 years or more.

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