The Paradox of Thrift Could Kill the Economy

03/29/2010 10:00 am EST

Focus: MARKETS

Gary Shilling

Columnist, Forbes

Economist Gary Shilling says the economy will remain weak until Americans start spending freely again.

MoneyShow.com: Gary, you've been a bear for a while. Are you still bearish?

Dr. Gary Shilling: Well, I am because the economy does not look all that hot to me. It is really up to the consumer. The big banks have been bailed out, the smaller banks have a lot of real estate problems, the tale is going to be told by the consumer and the consumer is retrenching. The consumer has been on a borrowing and spending binge for 25 years.

Now US consumers are moving to a saving spree. They simply cannot support big spending anymore. They do not trust their stocks, they have sucked the money out of their houses. The post-war babies need to save for retirement, and unemployment continues to be a serious problem, which makes people want to save for an uncertain future. So I think they are embarked on a genuine savings spree that will probably continue over the next decade. But more important for this year it means to me that we are going to have slow growth at best, and we could have a couple of down quarters in terms of economic activities as consumers simply pull back and say, "hey we got to spend less, we got to save more, we got to repay debts."

Q: But is not that good long term?
A: Oh, it is very good long term. The problem is that consumers are now 71% of GDP. They are almost three-quarters of economic activity, and when they are not spending the economy is not doing well. Stocks, however, I think are anticipating a V-recovery. You know, straight up this year.

And that economy in my view is not going to be forthcoming, so there is plenty room for disappointment. What we have seen in the last few weeks may be the beginning of a fairly substantial sell off in stocks.

Q: What would change your mind? What signs would you look for to throw in the towel?
A: If consumers went back to their profligate ways, free spending, etc., that would be the thing that would make the big change.

But other than that, there simply are not other sectors in the economy that are going to pick up the slack. Housing has way too much in the way of inventories to have any revival to mean anything; capital spending, again way too much excess capacity; state and local governments, hey they are out of revenues, they have to cut back; the four-inch sector, that depends on the economic health of the rest of the world, and I think the rest of the world is not as strong as many people think. I happen to think China is a house of cards, but that is a whole other topic.

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