Americans have steadily stopped saving over the last 28 years. In 1981, they saved over 11% of their discretionary income. Today, they save nothing. They are now in full spending mode. They have borrowed money against their future income, against their home equity, and on simple promises to pay (signature loans: credit cards). They have stretched themselves thin with respect to debt.
If oil goes to $400 a barrel, or $500 a barrel, and stays there for a year, American consumers will be in panic mode. They will have to cut their budgets, and they have forgotten how to cut their budgets. They have forgotten how to save.
The strategy of the optimists is to tell us that the worst is over economically. This is the government's official position. Chairman Ben Bernanke does not say this. He keeps hinting of more trouble to come. He keeps telling us that the Federal Reserve System is monitoring events. He keeps implying that there is some sort of rabbit still remaining in the Federal Reserve System's hat which they can pull out if the banking system moves into paralysis mode. But he doesn't tell us what these rabbits are, or under what conditions the FED will pull them out of its hat.
The official government position on the economy is pure propaganda.
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