Debt Suggestions

Suggestions on how to get out of and stay out of debt

No, it’s not just you — the U.S. economy really is bewildering. The government says gross domestic product expanded at an annual rate of nearly 4 percent in the third quarter, the fastest pace in a year and a half. The stock market is still up by 4 percent for this year, despite a sharp 3 percent drop on Nov. 7. On the other hand, growth in consumer borrowing slowed unexpectedly in September. Some economists argue that the U.S. is teetering on the brink of a recession, if it isn’t in one already.

Oil has exploded to nearly $100 a barrel, gold is near an all-time high, and the cost of food is soaring. It seems like high prices are breaking out all over, right? Yet the core rate of inflation is less than 2 percent a year, according to one widely followed measure. Confusion reigns right on up to the Federal Reserve, whose interest ratesetters are openly disagreeing about whether more cuts are needed.

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March 31, 2008 — There’s no magic bullet, says Steven Fazzari, economics professor at Washington University in St. Louis. The root cause of the current economic slowdown in the U.S. goes back several decades. There has been a concurrent wave of increasing consumer spending and rising consumer indebtedness. In the past, consumer spending actually helped the economy as it raised firms’ sales and encouraged more hiring. But the associated rise in household debt, most obviously in the recent housing bubble, has come back to haunt the U.S.

“For more than two decades we had consumer-led growth, which actually mitigated the recessions of the early 1990s and 2001,” Fazzari says. “Part of the reason we had mild recessions was due to consumer strength. But we kept building up debt. It was also a period of falling nominal interest rates. This meant that every cycle of low interest rates was another opportunity for people to refinance on better terms and extend their spending further.”

The economy is changing, however, and we can’t rely on consumer spending to keep rising beyond its already inflated level; households can no longer push the debt limit because the credit isn’t there. Even the Federal Reserve Bank’s move to lower interest rates doesn’t give Fazzari much hope for a turnaround.

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There is growing talk on Wall Street about the possibility of a recession. Since the beginning of the year three Wall Street firms (Merrill Lynch, Morgan Stanley and Goldman Sachs) have all stated they believe we are either in a recession already or are very close to a recession. In other words, it’s no longer a matter of if a recession happens but when it will happen and how long it will last. In response to these developments, various presidential candidates have proposed various solutions. However, none of these will work, largely because this is not a typical slowdown caused solely by slowing consumer spending or business investment. Instead, it is a slowdown caused by inflated asset prices and a nation gorging on debt. As a result, it will probably take a lot longer to come out from under this problem.

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