Some news from Canada, from the London Free Press:
Monitoring the U.S. slowdown
By Stephen S. Poloz
Everybody agrees that the American economy is slowing, but by how much? Are we looking at a nice, soft landing, a bumpy landing, or a crash? The answer matters a lot, but it is complicated.
The issue comes down to the behaviour of the U.S. consumer, who is responsible for over 70 per cent of the spending in the U.S. economy and more than 15 per cent of all the spending in the world.
The U.S. consumer has been on a tear for years, spending all income received, borrowing to buy houses and cars, and refinancing mortgages to take equity out of rapidly-appreciating homes.
All this has meant a negative rate of saving for consumers, which is unusual to say the least. It has also meant a record level of consumer indebtedness.
…
It is against this backdrop that we must consider the current housing downturn and what it might mean for the U.S. consumer.
…
The question is, what will be the psychological effect of the popping of the U.S. housing bubble?When American consumers see media reports suggesting that their housing market has crashed, imploded, or giving other extreme descriptions, will it encourage them to keep borrowing and spending money?
Speaking of psychological effects of the bubble, people who bought at peak will not accept that their (smart investment) house could be worth less
“The U.S. consumer has been on a tear for years, spending all income received, borrowing to buy houses and cars, and refinancing mortgages to take equity out of rapidly-appreciating homes.”
Sounds a lot like the roaring 20’s to me.
That last sentence:
“When American consumers see media reports suggesting that their housing market has crashed, imploded, or giving other extreme descriptions, will it encourage them to keep borrowing and spending money?”
scares the hell out of me.
Considering how far over the top of their borrowing ceiling a nice chunk of the population already is, why won’t they keep going until someone says they can’t?
As long as the banks say yes, there are going to be people who borrow more than they can possibly repay. If the banks had some kind of lending standards, it might not be that big of an issue, but the anecdotal evidence (24 year olds with $1.5M in mortgages with no skin in the game beyond their word.) suggests that the percentage of people likely to be in trouble already is significant and I can’t figure out how it stops growing before it collapses on itself.