What do economists think of the recent credit squeeze? Everyone is waiting for the rising foreclosures and sinking bad debts to trickle down to everyday consumers. Will we experience another depression? Will bread cost $10 a loaf?
"For the past 25 years, America has experienced a period of rising consumer debt," said Steven Fazzari, an economics professor at Washington University in St. Louis. "Up to now the high debt levels have had a positive influence on the economy. In fact, it was a stimulus to economic growth. But now it's likely to become a source of economic contraction."How is increasing debt a positive influence on the economy? Sure, if you double your income by borrowing money you don't have, you can spend more. Is that good for the economy? Ask a marathon runner if it's a good idea to drink a gallon of coffee and start out in a blistering fast run.
"Our research suggests that we're facing a much more serious problem due to our consumption habits, that could have a much bigger impact,"When you think about everyone who refinanced in order to cash out equity in their homes, they have been spending money that they didn't really have. Now their equity is gone, they can't pay back their loan, and the supply for their spending surplus is dried out. Now they have to live on their income alone, plus pay hefty monthly payments on all that debt they accumulated. It's no wonder they won't be spending much elsewhere.
"What will people do when offers for new credit cards don't show up in the mail three times a week? People won't be able to simply pay off old loans with new lines of credit. They'll be forced to service their debt, if they can."Perish the thought.