So now the consumer-based economy has fallen on hard times, or is headed back to what I like to call “normal." This is where you put a little aside each month, and build up a cushion for a rainy day. You save to buy things that you can’t immediately afford, and you stop caring about what someone else owns. If we’re lucky, we may even end up in a place where we learn to help others and donate our time and money.

Aggressive Reversal Approach

During the Depression, the United States was a massive creditor nation. We'd loaned vast sums of money to Europe and other parts of the globe. But this time around, we're the debtor, and must rely on the kindness of others. Hopefully our existing lenders will find us “too big to fail,” and will keep on lending in an effort to get us out of this mess. But in the end, you can’t borrow your way out of debt. New debt doesn’t fix old debt.

The government is trying to do everything to get this economy restarted: giving money to the banks, taking the toxic assets, bailing out auto companies (even though we've let plenty of them fail in the past), insurance companies, tax breaks for middle to lower income, taxes on the rich, etc. All of these efforts are meant to restart the economy. The hope is that the banks will have the capital to start lending again and get us back on track. Everything they are doing is begging us to take another sip of the punch.

Permanent Damage

But even if you could wave a magic wand and make all of the old debt disappear, do you think that people have made a significant psychological shift yet? Do you think we would just go right back to consuming the way we used to?

My partner Tom Fant and I are of the opinion that it’s a 50/50 call at this point. If this equity market rally is right, and we have seen the peak in unemployment, we may not have created enough psychological damage to influence a generation’s spending habits. If however, the pain felt is greater, unemployment continues to rise, and hard times extend through 2009 and well into 2010, this may be just enough to cause our old ways of consuming to slow for an entire generation. This may feel bad at first, but in the end will be a better outcome that cleanses our economy.

At the tipping point, you change the entire approach to the economy. The consumer model of the last 30+ years goes away for a long time. People who have lost their house won’t lever up again with cheap money. Consumers who have had to declare bankruptcy won’t rush out to buy that shiny new Viking grill for the backyard on the fifteenth Visa (V) offer of the week. Creating cheap or free money won’t have an effect on the consumer. You are then “pushing on a string.” You can make the loans cheap and easy to get, but you can’t make me borrow and spend.