Monday, October 10, 2005

Is this how the consumer boom ends?

Marketwatch's Marshall Loeb had an interesting article from the perspective of the future:

Anybody with a bit of imagination, with a feel for the future, can construct a plausible scenario. Like this: We should have seen it coming.

We were living beyond our means, saving absolutely nothing, spending more than we were earning -- like there was no tomorrow.

Most Americans were doing that. Worse, the government was doing it -- piling deficit upon deficit. And at the end of 2005, the total federal debt per U.S. household was more than $450,000.

But, as it always does, profligacy caught up with us. And the economy, which had been growing at a comfortable 3 to 4% rate for many years, came crashing down last year, in 2006.

If we think ahead and see how we are living beyond our means as a country, it's easy to see that at some point in the future, it will catch up with us.

Because it imported far more than it exported, the U.S. switched from being the world's largest creditor nation in 1981 to its largest debtor in 2005.

In that year, China held almost $200 billion of the U.S. debt, Japan held almost $700 billion, and even the OPEC countries held almost $50 billion.

That gave all of them tremendous power over the U.S. If they ever decided to dump some of their mountains of dollars -- either for pure economic reasons or out of political pique -- they could totally destabilize the U.S. economy.

Fears of just that kind of move caused foreign investors to pull part of their funds out of the U.S. investments, weakening markets here.

With all the media attention about consumer credit overextended, it may come as no surprise that 2006/7 will be the year for cautious spending and more saving. Let's hope this scenario above won't play out as bad as it can be.


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