Friday, January 23, 2009


Downsizing the Economy

Here’s a revealing article on how failing US businesses are starting to prefer liquidation over bankruptcy. Obviously a lot of business people have just lost hope, and prefer to put their businesses out of misery fast.

But even more interesting is this passage.
Now that consumers actually have to pay cash for what they buy—rather than borrow it on credit cards or through home-equity loans—there's concern that consumer spending will settle permanently at a lower plateau. And so, the thinking goes, what's the point of keeping all those Circuit City, Whitehall Jewelers, and Steve & Barry's stores open?
This is the part that really grabbed my attention. There are two important themes here. First, people have to pay cash for their purchases. Personally I think that’s a good thing, as all that easy credit (=debt) is what got us into trouble in the first place. Second, if people have to pay cash, they’ll buy a lot less. Of course, this is real bad news for the consumer economy, and that’s the reason for the note of subdued panic here in writing “there’s concern that consumer spending will settle permanently at a lower plateau.” About that there is no question.

Since the worldwide consumer economy depends on keeping the consumers consuming at hyper-light speed, you can see the implications here. Just as, a few posts back, we saw how crimped personal consumption is putting miners out of jobs in droves, absolutely everything is going to be scaled back, and the whole world economy will be downsized.

President Obama is no doubt under tremendous pressure to do something that will prop up the current economy, but he should resist that pressure to throw good money after bad. Hyper-consumption is finished. He should take action now to preemptively downsize the economy and restructure it.

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