The savings rate has shot up from zero to 6% in just a very short time. It used to be 12%. It wouldn't be all that unusual historically for savings to go to 9% or more in a few years. That means that consumer spending will drop by 9%.

Since consumer spending was 70% of GDP, that new lower level will become our new normal. And of course, due to population growth and hopefully increasing incomes, consumer spending will once again grow from whatever that new normal will be. But it's going to take some time for spending to reach the level of our productive capacity of a few years ago. We're going to have to shutter a few factories and businesses.

David Rosenberg, now with Gluskin Sheff, offers us this insight:

"What really struck us in the employment report of a few weeks ago was the fact that the only segment of the population that's gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over 6 million positions. This is epic." [See chart below.]

                                    
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Rosenberg continues:

"Moreover, the number of 55-year-olds and up who have 2 jobs or more has risen 1.1% in the last year, the only age cohort to have managed to gain any multiple jobs at all. Remarkable. These folks have seen their wealth get destroyed by 2 bubble-busts less than 7 years apart ... the Nasdaq nest egg back in 2001, and the 5,000-square-foot McMansion in 2007. Both bubbles ended in tears ... and so close together."

As you'll see, the housing market is going to take at least 2 more years to truly recover. It's silly to consider one month's housing data showing housing starts up a few thousand to be a sign of housing market recovery. Housing starts are anemic and the inventory of unsold homes is still at all-time highs (a ten-month supply), with more and more homes coming onto the market through foreclosure.

The multiple causes of the recession aren't subject to a quick fix. Offering to pay someone $4,500 to trade in an old car for a new one is a rather pathetic way to try and jump-start consumer spending and the auto industry. Isn't it enough that we will "invest" $50 billion in GM, while shrinking the company to a size where it will be difficult for its profits to ever pay back that investment? Do we have to add insult to injury and borrow more money to buy cars? Care to wager whether GM will need more money within 5 years? (By the way, I love my GM Cadillac and will likely buy another one at some point, so I wish them well.)

The "stimulus plan" was ill-conceived and not very stimulative. But the massive monetary infusions from the Fed and the Treasury have pulled us back from the brink of Armageddon. But we're not out of the woods yet. There's much heavy lifting to be done on the way to the land of the new normal.