I have noted before that if one's household earns $60,000 annually, but spends $100,000, life is good — that cool vacation, a new car, that big screen TV, etc. The following year, if one's household earns $65,000, but spends $110,000, then more of the same. One simply borrows the difference.
The problem is that pesky request to begin paying back the formerly borrowed money, along with that annoying interest expense. This cycle can continue as long as one can find additional lenders and one can make requested payments on time. Unfortunately, this whole approach to "living beyond your means" comes home to roost when the lenders say no more, when the cost of the debt payments and interest payments finally overwhelm the household.
Welcome to Greece today … and possibly the United States tomorrow
What is true for the household is also true for a nation. Greece has been living beyond its financial means for years, with borrowed money making up the shortfall. The lenders and investors in Greek debt securities have finally said no more.
The American economy is akin to an automobile moving down the highway. This vehicle actually has two gas pedals — one for fiscal stimulus (government spending) and one for monetary stimulus (money creation by the Federal Reserve). The multi-part brake pedal combines a list of concerns (or anxieties) impacting both businesses and consumers.
This "anxiety list" (detailed in an earlier column) includes such factors today as fears of a possible and temporary U.S. default on its more than $14,000,000,000,000 national debt and of whether government ever will get spending under control. It includes anxiety about volatile stock prices and declining housing values.
It also includes debt anxiety about Greece and other European nations and how that might impact us. Oil price volatility tied to developments in the Middle East and in northern Europe also impact our confidence level. In fact, consumer confidence, as measured by the Conference Board, fell to an eight-month low in June as reported Tuesday.
Never before has the American economy had two gas pedals pushed to the max, pushed to the floor, as now. U.S. government spending today is TWICE what it was 10 years ago. Of every dollar government spends, it borrows 41 cents, comparable to the household noted at the beginning of this piece.
The Federal Reserve has had its gas pedal to the floor for three years, with a tripling of assets on its balance sheet, all financed with newly created money.
The American economy is on stimulants, on steroids as never before. And yet we struggle, with economic growth at a weak 1.9 percent real (after inflation) annual rate in 2011's first quarter. Second quarter growth is expected to be only slightly better.
More talk has emerged of another down leg for the economy, another recession. One respected economist (yes, an oxymoron) noted in recent days his forecast of a 99 percent chance of another U.S. recession before the end of 2012. Ouch!
For now at least, the consensus view of forecasting economists sees U.S. economic growth at a 2 percent to 3 percent real annual rate over the next few quarters. Various economists note that some of the issues that slowed the economy in recent months, including the Japanese earthquake/tsunami/nuclear disasters that slowed U.S. auto production — as well as the upward surge in oil and gasoline prices — will prove temporary. Let's hope so.
Still, exactly how can both gas pedals be maxed to the floor, with resultant soft U.S. economic performance during two years of economic recovery? The answer is a collective loss of confidence in national leadership. Business professionals and consumers are scared to death of government out of control.