Consumer Deleveraging Is A Good Thing

Americans’ Debt Cutting Hampers Growth –

Jon Hilsenrath and Ruth Simon of the WSJ echo and fortify what David Brooks was saying in The New York Times last week: three years after the start of the global financial downturn, Americans are starting to liquidate their consumer debt, down 8.6% in over the past 38 months. Any fiscal conservative would take that as good news: the people of the United States have taken a small but important step toward becoming a nation of savers and investors again.

But for some reason, the article (starting with the headline) seems to take a negative view of the trend:

Credit squeeze

Consumers are starting to squeeze back. Wall Street is not happy. (Image by alancleaver_2000 via Flickr)

The national belt-tightening, known as deleveraging, comes as the U.S. economy struggles to fend off a double-dip recession. Paying off bills slows consumer spending on appliances, travel and a slew of other products and services. Home sales, the engine of past economic recoveries, remain depressed.

This is all true,  no doubt, and a lot of us are revisiting our Keynesian roots these days. But short-term pain is better than long-term pain. The sooner American consumers learn to live within their means and stop competing with enterprises for increasingly tight credit, the faster we can begin to rebuild an economy that need not rely on financial manias to drive prosperity.

What is more, it is still an exaggeration to say that Americans as a whole have rediscovered the virtue of thrift. Much of the “de-leveraging” is the result of credit default. It will take some time before we can really judge the extent to which behaviors have changed for the better, or whether Americans will return to their spendthrift ways just as soon as they think they can afford it.

1 thought on “Consumer Deleveraging Is A Good Thing

  1. Pingback: It’s Consumer Spending, Stupid – | Odds and Ends: Pit's Complete Waste of Bandwidth

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