From the December-January 2011 issue of Treasury & Risk magazine

Thrifty Consumers Limit Growth

It has become almost trite to describe current U.S. economic circumstances in terms of the biblical prophecy that seven years of plenty will be followed by seven years of famine. But the analogy is still apt. The consequences of a debt-induced asset bubble last long after it bursts. The debt built up during the bubble is a burden that inhibits economic growth for years after memories of the good times have faded.

Consumers have decidedly changed their behavior, eschewing the use of credit and concentrating instead on reducing debts. As long as the tendency toward frugality persists, the growth of consumer spending will be restrained. And as the consumer goes, so goes the rest of the economy. Instead of the annualized 5% to 7% growth rates that were common after the end of recessions from the 1950s through the 1980s, a 2.5% to 3.5% GDP growth rate may be all that can be hoped for in the next few years.


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