Theory: As household liabilities drop, their spending will rise.
Could happen… or maybe not.
One take, from Deutsche Bank:
This adjustment, if it continues to occur, will be a significant drag on growth through 2011; potentially enough to hold the economic expansion to or even below trend. However, the effects of the more recent firming of the stock market and the ongoing rundown in the household debt should begin to bolster wealth enough to put the saving rate on a mildly downward trajectory again in 2012, enough to allow consumer spending to become a modest engine of growth again. With pent-up demand for consumer durables likely to be building in the interim, the economic recovery could very well turn up more briskly in 2012 and beyond.
Basically their take is that bank deleveraging caused by defaults on home and consumer loans will accelerate through 2011, dragging down the economy. After all, who, except for Real Housewives of Orange County, wants to go shopping while their house is in foreclosure?
But then once people are clear of their debt, they will start loading up on consumer products again.
That may happen BUT it sort of assumes they can get loans. And for now the banks are saying, rightly, “once burned twice shy”. The banks say… hey, I’ll take some of this free money, loan it to responsible people (they exist), and make a mint, no risk.
I really don’t think anybody thinking positive about the next 10 years is really looking at what is going on. No institution in the US government is doing ANYTHING RIGHT economically. Tax increases, or spending cuts are likely. Maybe both.
Frankly, I think we (as a nation) have been so irresponsible and reckless that we have to take our lumps and the big fight will be over who gets the biggest lump – the responsible or irresponsible. Democrats represent the irresponsible, Tea Party the responsible. Republicans… well, rely on them to be stupid.