The US No Longer Takes What the World Makes

03/12/2009 12:00 pm EST


Gary Shilling

Columnist, Forbes

Gary Shilling, editor of INSIGHT, says that the reversal of a decades-old US borrowing and buying binge will have even a bigger impact in global markets.

In the 1980s and 1990s, American consumers were more than willing to cut their saving rate because they believed stock portfolios would continue to grow rapidly and take care of all their financial needs.

Then, when stocks collapsed in 2000-2002, house appreciation seamlessly took over to continue to push down the household saving rate from 12% in the early 1980s to zero. Americans saw their houses as continually-filling piggybanks because, they believed, home price appreciation would continue indefinitely.

The flip side of saving less is borrowing more, as shown by the leap in all consumer debt and debt service, both in relation to disposable (after-tax) income and relative to assets Amidst this consumer borrowing and spending binge, consumer spending’s share of GDP leaped from 62% in the early 1980s to 71% at its peak in the second quarter of 2008.

Now, however, consumers have run out of borrowing power. For decades, credit card issuers and other lenders encouraged consumers to indulge in instant gratification. Buy now, pay later. But now, habits are changing.

For the next decade, we’re forecasting a one-percentage-point rise in the saving rate annually. This means a reduction of about one percentage point in real GDP growth, from 3.6% per annum in the 1982-2000 years to 2.6%.

The effects of a consumer switch from a 25-year borrowing-and-spending binge to a saving spree will be profound for the US economy. Even more so for the foreign economies that have depended for growth on American consumers to buy the excess goods and services for which they have no other ready markets.

In 2007, US consumers accounted for 18.2% of global GDP, and that share has jumped from 14.9% in 1980 and 16.8% in 1990. We can’t overemphasize the importance of the profligate US consumer in fueling economic growth in the rest of the world.

With subdued US consumer spending in the years ahead and the resulting weakness in American imports, economic growth abroad will be even weaker than in the US. Since the early 1980s, world trade has functioned in a smooth but unsustainable fashion. The rest of the world produced and America consumed.

In many foreign lands, households were weak consumers and big savers, so production exceeded domestic consumption. Their production surpluses were exported to the US, where consumers were saving less and less and spending more and more. With their growing trade surpluses, foreign nations had growing piles of dollars that they recycled into Treasurys and other American investments.

The system proved unsustainable because the collapse in the US housing bubble and the follow-on stock market nosedive and widespread financial crisis eliminated US consumers’ ability to continue to borrow to finance oversized spending, as discussed earlier.

Now, with American consumers embarking on a saving spree, the US will no longer be the buyer of first and last resort for the globe’s excess goods and services.

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