After ages, Americans’ overspending culture under threat

Most economists think the economy is headed for a significant slowdown as housing prices keep falling, consumers grow tight, and businesses cut investments. The Federal Reserve last week said it expected the economy to grow 1.6 per cent to 2.6 per cent next year, a stark contrast from the 3.9 per cent rate registered in the most recent quarter. Some see signs of a severe recession that would feature a plummeting stock market, a lower dollar and the loss of many jobs.

The most bearish indulge frighteningly gloomy tones. “The evidence is now building that an ugly recession is inevitable,” declared Nouriel Roubini, among the first economists to warn of the dangers of a real estate downturn. “When the US sneezes, the rest of the world gets the cold. And since the US is risking a serious case pneumonia, the world should start to worry about a serious viral contagion.”

Most economists are not so pessimistic. The most likely outcome, they feel, is a slowdown or a mild recession. That would increase unemployment and keep the stock market in the doldrums, but probably not be severe enough to significantly crimp economies abroad.

Americans have been buying goods from overseas using money lent by foreigners. Foreign exporters have been relying on Americans to keep them in business. For years, this dynamic has made for increasingly lopsided terms of trade. Last year, American imports outstripped exports by $764 billion, with foreigners stepping in to cover the difference.

Economists have long intoned that some day the US will be forced to stop depending upon the largess of foreigners. Some have warned of a worst-case scenario where foreigners holding American debt get spooked that the value of the dollar is about to plummet and dump the currency. This would jack up the price of imported goods in the US, making it harder for Japan, China and Europe to sell their wares, and delivering a global recession.

Faced with slower business at home, Americans would be more inclined to save. That would force Japan, China, India and other export giants to find new ways to prosper without leaning on the American consumer. The world economy would be cleansed of its imbalances, emerging stronger. The more optimistic suggest that this very scenario is now unfolding.

So, for better or worse, Americans and countries whose prosperity is tied to Americans’ spending are apparently headed into uncharted territory. We are about to find out what happens when the easy money runs out.