Summarizing my three year old thesis

March 13, 2009 at 12:54 pm | Posted in economics, Housing | Leave a comment
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I’m back after a long break from writing. I’ve been thinking about how psychology plays into the recession – in fact, most of my direst predictions of the past three years have played out, often worse than I expected, mostly because I think I got consumer actions right.

My thesis can be summarized as follows: The US economy is 70% consumer spending. Much of business spending is in anticipation of future consumer spending ( or anticipation of other businesses anticipating consumer spending). With the savings rate near 0% and housing slowing down, there was no wealth effect or accumulated assets to drive spending, so any correction in house prices must necessarily slow down consumer spending and thus the economy as consumer’s try and fix their balance sheets and their income statements (expenses and savings % equivalent to net income margin for business). Businesses would respond accordingly, and, while exports could help, a lot of global income – especially emerging markets like China, is dependent directly or indirectly on US consumer demand. The bottom had to fall out of the market, and the banking system was going to be part of that because of housing and consumer exposure (Credit cards are yet another shoe waiting to drop). Oil prices didn’t help but were not central to the argument.

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