As long as we’re on economics

Stephen Roach sees history repeating itself:

In the two oil shocks of the 1970s, the personal saving rate averaged about 9.5%, whereas in the oil shock just prior to the Gulf War of early 1991, it was around 7%. That means that in each of those earlier instances, US consumers had a cushion of saving they could draw upon in order to maintain existing lifestyles. Today’s “zero” saving rate underscores the total absence of any such cushion. The only backstop available to support the spending excesses of American consumers is the saving that is now embedded in their over-valued homes. Yet with the housing bubble now in the danger zone, that’s not exactly a comfort zone.

There is another eerie parallel with earlier energy shocks that should not be taken lightly. Just prior to the two oil price spikes of the 1970s, discretionary spending by US households had also gone to excess. The GDP share of consumer durables and residential construction — the latter being a proxy for the discretionary demand for shelter — was running at peak levels of around 14.5%. In the aftermath of those two earlier energy shocks, discretionary spending collapsed — with the combined share of consumer durables and homebuilding falling to 11.5% in the mid-1970s and 10.5% in the early 1980s. These were the most severe consumer-led recessions on record in the United States. In the current expansion, discretionary household spending has moved into a similar zone of excess. The combined share of consumer durables and residential construction has averaged 14.3% of GDP over the past year — virtually identical to peak shares hit just before the two energy-shock-induced consumption collapses of the 1970s.

In other words, just as the energy shocks of the 1970s hit US households at a point when their spending behavior had gone to excess, the same is the case in the present climate. Yet unlike those earlier periods, today’s asset-dependent, overly-indebted American consumer is lacking any semblance of a backstop of income-based saving to shore up the downside. It would be one thing if American consumers were committed to defending modest lifestyles. It is another thing altogether in today’s era of excess — there is much more room and greater urgency for consolidation.

But what does he know? He’s only the chief global economist for Morgan Stanley. My real estate agent – who went to law school and passed the bar two years ago on her third try – says real estate is the best investment I can possibly make! I don’t have to put anything down, and with a zero-down Adjustable Rate Mortgage, I can cash out my equity later, buy some new clothes and have total flexibility.

Those banks sure are stupid. As soon as interest rates go up, I’ll just switch to a fixed-rate mortgage. I bet they never thought of that!