I keep reading how the huge amount of debt brought on by the housing boom and taking out loans on people's homes are going to cause a huge stoppage in consumer spending, triggering a huge recession.
Is this bogus or not?
why? I mean is it really that bad or different than in the past? You dont think people will keep spending?
2007-02-19 00:43:36 · 5 answers · asked by Coco32 1 in Social Science ➔ Economics
If credit card debt were a substantial portion, it could be warranted. However, most of the debt you speak of is secured.
You also notice credit card debt will swing in correlation with interest rates.... there is a lot of truth that raising rates will slow the economy down (and in this case, in a positive way).
2007-02-19 13:39:44 · answer #1 · answered by Anonymous · 0⤊ 0⤋
It is a bit more complicated than that, but yes, profligate consumer spending can bring on a nationwide economic recession. It has happened several time during the past sixty years. At least in the United States though, recovery has happened in a fairly short time and the majority of the population never experiences the ill effects of the recession personally.
One of the problems with trying to get your mind around the question is that the media all too often uses the terms "recession" and "depression" interchangeably. There is a tremendous difference - a true economic depression is far more widely felt, lasts longer, and it's consequences impact a great many ordinary people in a profound way. The last serious economic depression was the "Great Depression" that began in 1929 and lasted until the beginning of World War Two. You could learn quite a bit by studying the social impact of that event. In the depths of that Depression, people starved and froze wholesale. You could have counted yourself exceptionally fortunate to find a job splitting firewood by hand for 18 hours straight and be paid fifteen cents for it. You'd buy a loaf of bread for a nickel and a couple codfish with the dime, and take that home to your wife and that'd be dinner for you, her, and your three kids (that happened in New Jersey - one of those three kids later became my father). Trouble was, next day you go back to split more firewood and the guy who paid you yesterday has no more money and can't hire you today. So maybe you climb aboard a boxcar in the rail yard and, like so many men those days, become a "hobo", riding the freight trains (illegally) around the country trying to find work.
Today, unrestrained consumer spending has put more of us deep in debt than ever before - and economists are rightly worried that if we can't pay off that debt, our habits will eventually lead to some serious consequences. Another "Great Depression"? I don't think it'll get that bad - consumer spending didn't really have that much of an impact in 1929 - but it could be serious enough that it undermines confidence in the dollar as the preferred international medium of exchange, and if the rest of the world decided to stop using it - well, there indeed would be the next serious economic depression. So yes, the risk is real, not bogus. Not enough ordinary people understand the risk to themselves, and so you're right: we'll keep on spending - but that won't prevent a recession and certainly wouldn't prevent a depression.
2007-02-19 01:37:46 · answer #2 · answered by Anonymous · 0⤊ 1⤋
The people will get burned are about 10% of the population buying house with interest only loans that financial instutions knew they could not afford, but with cheap money flowing around the world the economy in Untied States will grow its 3% like for 2007, and 2008. Pesonal debt will not cause a recession because the economic fundementals of the market are working, and people put thier money into mutal funds, stocks instead of bank accounts because the interest rate banks pay are less than inflation. The housing prices will fall another 5% in the next year, but other sectors of the economy will hum along fine, and healthcare, transportation, retail, finance will grow better this year.
2007-02-19 05:36:59 · answer #3 · answered by ram456456 5 · 0⤊ 0⤋
Its not rocket science to work out that if people have more financial commitments each month and increases in those commitments through interest rate rises, then they will have less disposable income left to spend freely, spending has never been at these current levels before, so it has to be controlled
2007-02-19 00:50:58 · answer #4 · answered by SunnyDays 5 · 0⤊ 0⤋
People spend the money they have. It will not cause a slowing of the economy.
2007-02-19 00:51:22 · answer #5 · answered by Marshall Lee 4 · 0⤊ 1⤋