It is an unfortunate fact that we live in a world of imbalances.
Three years ago, the global economy was dependent on American consumers shopping until they dropped, which they finally have. Today, that same world economy is dependent on China building a city the size of Houston every two months.
Something is wrong with this picture and people everywhere are realizing it. It's the reason why Americans are saving at a 6% rate in recent months and why some economists like Gary Shilling are predicting consumer spending will stay in the 2% area for the rest of the decade.
For two decades, financial journalists wrote articles saying baby boomers weren't saving enough for retirement. Some called it fear-mongering. I was on a panel three years ago with thought-provoking economist Laurence Kotlikoff of Boston University, and there he accused the entire financial services industry of telling Americans they needed to save way too much so they could continue "pimping risk"-meaning equities.
Judging from consumer behavior and attitudes, ordinary folks aren't buying into the idea that they have saved excessively. Instead, they are more likely to believe an article Kotlikoff recently penned for Bloomberg News arguing that the U.S. is already bankrupt. The good professor offered two solutions: a dramatic streamlining of all federal government departments or a doubling of everybody's taxes. Raising taxes on the upper 2% or 3% of income earners plugs a $1.5 trillion annual deficit for about one week.
Folks of all stripes are ready for sacrifice across the board and they need not be nearly as drastic as academics with a flair for grabbing headline might argue. It's happening around the world. Denmark recently slashed unemployment benefits from four to two years and people dealt with it.
Soon it will be playing at a theatre near you. New Jerseyans also accepted a cut of $50 a week, or about 8%, in unemployment benefits. And a Wall Street Journal focus group in Richmond, Va., found citizens willing to accept serious budget cuts, a national sales tax and higher Medicare co-payments.
So it's surprising when the world's most famous bond fund manager calls for the government to use Fannie Mae and Freddie Mac to lower interest rates on millions of mortgages, claiming it will increase home prices 10% and generate another $50 billion in consumer spending. That's peanuts in a $14 trillion economy, and how long will it prop up housing prices?
The deleveraging process will last a lot longer. The people know it; our elites don't.