Pushing String

How will Americans cope with a world where borrowing, even after the credit crunch de-crunches, has a whole new set of rules? Household debt sits at around $13.8 trillion! The people have actually borrowed more than their government, and as I have said in a recent blog, U.S. households have borrowed 139% of their disposable income.

Big investment banks, allowed under that infamous April 28, 2004 SEC ruling I have written so much about to borrow well above the 12 to 1 debt to equity ratios imposed on the smaller financial institutions (Lehman Bros. and Bear Stearns died at somewhere between 32-22 to 1), now have to de-leverage (reduce their debt). This is especially true for companies like Morgan Stanley and Goldman Sachs that have voluntarily elected to become commercial banks, where the debt-to-equity ratios remain at that 12 to 1 level. Guess where they are getting some of the money they need to pay off that debt (and create enough balance sheet solidity to handle any crises that may fall in the coming months)? Yeah, that hoarding thing again.

Besides the fact that the “home equity” is just a house, and in spite of the fact that losing a job (or the prospect of losing a job or getting less overtime, etc.) puts a damper on spending, exactly how are Americans going to cope with a world that has moved one giant step towards “pay-as-you-go” versus “go-now-and-pay-later”? Credit card limits and restrictions, discussed in earlier blogs, make borrowing for consumer goods much more difficult. Car purchases have all but ceased. Restaurants are experiencing severe drops in customers, and travel is something that seems to be relegated to necessity, business or a “virtual” trip on a computer or on television.

Empty stores and restaurants don't make Christmas look bright. We spent $460.2 billion last year in the 2007 holiday season, but don't expect anything but down this year. If you are looking for bargains – except for Japanese electronics (sorry, even with the Japanese stock market down, the yen is even stronger than the dollar) – boy is this going to be a great shopping season! And escapist movies – forget the serious stuff – are doing gangbusters at the box office.

Bit by bit, we will rebuild this economy. For all those who missed the Great Depression (almost all of us), the Great Recession (2008-????) will be the life lesson that generations of Americans will carry with them into the future. This is not a short-term fix which changes because we have a new President and a reconfigured Congress.

The key for the next administration is to recognize that government spending falls into three general categories: 1. Stuff we can't stop or limit, like paying our national debt or keeping us safe from criminals and our enemies, 2. stuff that really brings us no or very limited value (like the Iraq War, ethanol subsidies and pure pork), and 3. investments in our future growth (such as infrastructure development and repair, energy research, education and health care). The second category is where a President and the Congress have to cut the most, and the third category, despite rising deficits (don't worry about that!), is actually how we invest and fund our recovery and our future. Simple plan on a vicious political battleground. We will be back… but it will take years… Sometimes, it just feels like we're pushing string.

I’m Peter Dekom, and I approve this message.