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American consumers cut back debt by $21.5 billion in July -- a 10.3% annual rate, according to the Federal Reserve. Outstanding debt is down 4.2% from a year ago. That represents the biggest year-over-year decline since 1944. American consumers are wisely paying down debt. Economists are wringing their hands, wailing that "private virtue [thrift] is public folly." That's because consumption is 70% of the U.S. economy. But the fact that consumers are cutting back spending, paying off debt, and saving, is GOOD NEWS, although it will bring pain in the short run. Meanwhile, stock markets all over the world are feasting on the consumers' pain. We saw it this past weekend. Economists at an international gathering were told that economies remain weak; therefore, interest rates will stay low, and deficit spending will continue. Markets immediately celebrated. All this liquidity is buoying stock markets around the world. Your pain is Wall Street's gain.

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SurfPuppy619 Sept. 8, 2009 @ 6:18 p.m.

I saw this today and was going to forward it but I knew you would have probably already seen it-and I was right.

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Don Bauder Sept. 8, 2009 @ 7:01 p.m.

Response to post #1: It came out this morning but I didn't post it until this afternoon. When in doubt, send. Please. Best, Don Bauder

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Visduh Sept. 8, 2009 @ 7:58 p.m.

There are two sides to every coin, and when consumption falls, capital is created. This isn't exactly the traditional economic situation, but that reduction of debt does parallel the formation of capital, which can and will be invested. With a decrease of consumer debt, lenders can find more to channel into productive enterprise. This is good news for our economy, but long-term good news. It doesn't fix everything immediately, but feels quite painful.

Let's also not forget that while the consumers have reduced debt by over $20 billion in one month, the federal stimulus plan is adding to debt--of the federal treasury--to the tune of the full cost of that bill, $850 billion. If we are to really get out of this mess, everyone including consumers, business and government, need to de-leverage. Instead we just keep adding to the debt, and only a few pockets of the economy are actually reducing their debt exposure.

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Burwell Sept. 8, 2009 @ 8:26 p.m.

This isn't exactly the traditional economic situation, but that reduction of debt does parallel the formation of capital, which can and will be invested.

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The formation of excess capital, both domestic and foreign, is the fundamental cause of our current economic problems. The economy simply did not need the staggering amounts of capital that have been invested in public corporations during the past 30 years, mostly through tax subsidies in the form of IRAs and 401-Ks. US corporations are not building factories and manufacturing infrastructure and have no real need for this massive influx of capital. This excess investment pushed the value of stocks through the stratosphere without a corresponding increase in real earnings to support these high valuations. Economists as a group cannot grasp this concept because they are stupid. They cannot see that the Federal Reserve's obsession with maintaining stock valuations is destroying our economy. The Federal Reserve should concentrate on reviving manufacturing and reducing the trade deficit so the recovery will be sustainable.

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David Dodd Sept. 8, 2009 @ 8:47 p.m.

"..when consumption falls, capital is created."

"..reduction of debt does parallel the formation of capital, which can and will be invested."

Um. Show me some equations to prove this, please. You will certainly be turning the macroeconomic world right on its head, since it would mean that aggregate demand - presuming your theory is correct - is a constant that only increases or decreases depending on how much money the government puts into the economy, minus the import/export ratio.

In other words, if your statements are true, then the government would be wise to continue to print as much money as it can in order to increase aggregate demand.

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SurfPuppy619 Sept. 8, 2009 @ 9:44 p.m.

The Federal Reserve should concentrate on reviving manufacturing and reducing the trade deficit so the recovery will be sustainable.

By Burwell

I have been ringing this bell for so long now I feel like grandpa.

Why can't our idiot leaders get a clue? Probably because they care more about the short term and THEIR own careers than the good and general welfare of the country (as so many have pointed out here in this blog).

We need to force the chimps in Congress to read these posts over and over again until the get a clue.

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paul Sept. 9, 2009 @ 9:11 a.m.

How much of the $21.5 billion in consumer debt was defaulted (mortgage defaults, credit card write-offs, personal bankruptcies, etc). Is that evaporation properly accounted for, or would that skew the personal debt ratio to make it appear much lower than it really is? How much of the personal debt that disappeared was made good to the lending institutions by the various government bailouts?

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Visduh Sept. 9, 2009 @ 2:23 p.m.

In response to Post #5, income not spent on consumption is saved, and that is capital. Total income = Income spent + income saved (capital.)

As far as turning macroeconomic theory on its head, money spent by government that was printed for that purpose only does not alter real income. Diluted dollars give an illusion of prosperity, but unless the economy is really producing more, income doesn't change.

As far as our economy having too much capital, "staggering amounts" in Post #4, I think most economists would disagree. The US under-invested in productive assets (including infrastructure) for decades, and we are now paying the price for that in many areas, such as transportation.

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David Dodd Sept. 9, 2009 @ 2:41 p.m.

Response to #8:

AD = C + I + G + (X-M)

AD = Aggregate Demand, C = Consumption, I = Investment, G = Government spending, and X-M = eXports minus iMports.

If, as you suggest, that C and I cause one another to increase and decrease equally (more C means less I and more I means less C), then aggregate demand is reduced to government spending plus imports/exports. Capital and investment cease to be variables if one depends on the other.

Savings is not Investment. Savings MIGHT be invested, but it might not be invested. Therefore, it might not be capital. This is a point that Hayekians and Keynesians argue about all of the time. It is also the point where I break camp with Hayek and agree with Keynes.

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SurfPuppy619 Sept. 9, 2009 @ 6:07 p.m.

How much of the personal debt that disappeared was made good to the lending institutions by the various government bailouts?

By paul

The gov should not have backed ANY of that bad debt. They should have let the over leveraged companies go BK.

We should also return the rest of the "stimulas" money. The interest is too much, and we are not going to be doing ANY better with it (85% still not spent). Private profits and sociliazed losses is not what America, or free markets, are about.

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SurfPuppy619 Sept. 9, 2009 @ 6:11 p.m.

AD = C + I + G + (X-M)

AD = Aggregate Demand, C = Consumption, I = Investment, G = Government spending, and X-M = eXports minus iMports.

By refriedgringo

Gringo, you just gave me brain damage with that equation (no I cannot figure it out-I was always bad at alegrbra)!

I only know one equation- MxA = F :)

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David Dodd Sept. 9, 2009 @ 6:12 p.m.

"The gov should not have backed ANY of that bad debt. They should have let the over leveraged companies go BK.

We should also return the rest of the "stimulas" money. The interest is too much, and we are not going to be doing ANY better with it (85% still not spent). Private profits and sociliazed losses is not what America, or free markets, are about."

Yes. And there are two U's in stimulus, because after all, it's all about U.

But this fight will be lost, Surfpup. The politicians have the money, and they will spend it. They always do.

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SurfPuppy619 Sept. 9, 2009 @ 8:36 p.m.

Yes. And there are two U's in stimulus, because after all, it's all about U.

By refriedgringo

Not only do I not know algebra, I also cannot spell.

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David Dodd Sept. 9, 2009 @ 8:59 p.m.

Surfpup: I'm surprised Don hasn't show up here yet. There's enough material here for a whole extra column ;)

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Don Bauder Sept. 9, 2009 @ 9:27 p.m.

Response to post #3: Good point. This recession is all about deleveraging. For awhile, commentators were talking about it. But they don't seem to be now. The worst thing that could happen is if American households do what economists and politicians want them to do: go back to consumption and debt addiction. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:36 p.m.

Response to post #4: Good analysis. The federal government and Federal Reserve have been fixated on manipulating the stock market since the Reagan administration. They put a gun to your head -- 401(k)s, IRAs, etc. -- and tell you to buy stocks. Companies build plants overseas instead of at home so they can maximize profits, thus justify higher stock prices and even more obscene pay for top executives. Right now, Wall Street and corporations hope that consumers remain in rags, so the Fed will continue to keep interest rates extremely low and pump up the money supply in other ways. That liquidity buoys stocks and encourages financial engineering. (Speculators borrow in dollars with low rates and put the money behind higher-yielding assets.) It is an enormous economic imbalance that causes bubbles -- and angst when the bubbles burst, as they inevitably do. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:38 p.m.

Response to post #5: The Federal Reserve is printing as much money as it can right now. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:40 p.m.

Response to post #6: Our leaders are beholden to Wall Street. I am sure you have figured that out. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:41 p.m.

Response to post #7: Those are all good questions and I don't know the answer to one of them. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:43 p.m.

Response to post #8: One reason for the underinvestment in assets is that the money was going into financial engineering, such as mergers and acquisitions. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:46 p.m.

Response to post #9: Followers of Hayek and Keynes have more differences than this point. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:49 p.m.

Response to post #10: Privatization of the gain and socialization of the risk is definitely NOT what free markets are supposed to be about. But, sadly, it IS what America is about. Free market capitalism is more of a dream these days. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:53 p.m.

Response to post #11: You don't have to be good at algebra. You have to be good at economics, supposedly. I have never like these formulas, such as MV=PT, because I don't think economics can be mathematicized. Does anybody remember econometrics? It was heralded decades ago -- worshipped at UCSD. It flopped. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:55 p.m.

Response to post #12: The pols will spend that money in a way that pleases Wall Street. When you want to figure out anything in government, there is one sure path to verisimilitude: follow the money. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:57 p.m.

Response to post #13: It's all about getting U to do something you shouldn't: borrow and spend. Best, Don Bauder

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Don Bauder Sept. 9, 2009 @ 9:59 p.m.

Response to post #14: I was in the air and on the road today (Wed. Sept. 9). As you can see, I showed up. Best, Don Bauder

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