Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.As Krugman points out, this shouldn't surprise anybody because we've turned into a nation of borrowers. Our rate of savings has been heading steadily downward from 9 percent in the 1980s to 5 percent in the 1990s to .06 percent in 2006 and 2007. As far back as the late 90s, when Larry Summers was Clinton's secretary of the treasury, he began to sound the alarm on our declining savings rates. But it fell on deaf ears as the public cheefully ran up credit card debt, took out bank loans, and refinanced their homes with ARMs.
And Krugman isn't too optimistic right now.
And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.Krugman thinks the current economic stimulus bill doesn't go far enough to ramp up demand and get Americans spending again. I'd add that we have been a nation of borrowers and consumers but not producers. The erosion of our manufacturing base and the loss of well paying jobs has added the illusion, mostly on paper, that we were richer than we were. If you produce nothing, consume everything, and merely service everybody, that's not a prescription for a healthy economy because you are not creating wealth anyplace but in your imagination.