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Do the personal income data demonstrate unbalanced reflation?

The Department of Commerce released the Personal Income and Outlays data for June 2009.  What the data showed was a very unbalanced month in which personal income and savings dropped but personal consumption expenditures rose.  In my view, this is the type of dynamic we should look to avoid as it only increases the disequilibria which led to the unsustainable growth over the last decade. 

Seasonally-adjusted personal income for June came to an annualized $11.9 trillion. This is lower than Personal income in August of 2007.  In any recovery, personal income must increase for GDP gains to be sustainable over the long-term.  People who make less money can only buy more by increasing debt loads or reducing savings or both – clearly a trend which cannot last forever.

Meanwhile, consumption has increased slightly more robustly in the last few months. Nevertheless, we are still at November 2007 levels of consumption. But the savings rate slowed to 4.6% from 6.2%.  Both of these savings numbers are far too low.  Yet, for the US to emerge from recession, we need less savings, not more.

Apparently, policy makers are looking for a repeat of this unhealthy dynamic. And, with stock prices up 50% and house prices stabilizing, Americans are all too willing to oblige. Welcome back to the asset-based economy.

But, low savings and high debt will only make the next downturn that much worse.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

1 Comment

  1. Brick says:

    Where I think many businesses have learnt their lesson about leverage and debt, I suspect there is a range of consumers who have not. The treasury seems to want to return things to their status quo and so it should come as no surprise that we are returning to the debt fuelled economy.
    The only thing standing between us and the next collapse will be the improvements in regulation and any lessons the banks have learnt. Will the current decision maker’s decisions be viewed in a similar light to those of Alan Greenspan by future generations or will they be hailed as rescuers. I don’t know, but personally I don’t like to see problems unaddressed and left for our children.