Soon, the Debt Crisis. Today, the Doubt Crisis

By Derek Thompson

Robert Samuelson has a nice column today on the long and painful healing process of the American consumer. On an individual-by-individual basis, it makes sense to spend the hangover years nursing our savings back to health. But when everybody saves more, everybody spends less, which in turn gives companies and employees less money to earn, spend, or invest. 

In the next decade, the United States will probably have to address its debt crisis. But first, we'll have to emerge from an economy in which higher savings and lower demand surround companies and investors in a fog of doubt:

In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it's about 6 percent. Temporarily, this hurts buying. Declines in consumer spending in 2008 and 2009 were the first back-to-back annual drops since the 1930s. Since World War II, annual consumption spending had fallen only twice (1974 and 1980).

The recovery is a creature of confidence, or its absence. "In normal times, psychology doesn't matter much. It reflects economic conditions," says Zandi. "But in abnormal times, it's the reverse. Psychology determines economic conditions." What the boom and bust left is a massive case of collective doubt.

Read the full story at Real Clear Markets.

This article available online at:

http://www.theatlantic.com/business/archive/2010/08/soon-the-debt-crisis-today-the-doubt-crisis/62242/