Op-Ed: Ghost Towns, Ghost Malls
America haunted by past consumer excesses.
During the Gold Rush of the mid 1800s, towns sprung up in the middle of nowhere to support those looking to strike it rich. Similarly, in suburban America, thousands of malls over the last 20 years to support those delusional shoppers who thought they could spend their way to prosperity.
When the gold rush ended as abruptly as it began, the towns were abandoned. These ghost towns sat vacant for decades, slowly rotting away under the western sun. As you drive around today, you see more and more "For Lease" signs on retailers and strip malls that fell under the initial onslaught of consumer deleveraging. As the pace of retailers' collapse accelerates in 2009, larger malls will begin to go dark. Once bustling centers of conspicuous consumption and material decadence, built upon a foundation of consumer debt, they will become ghost malls.
For the last 20 years, the American consumer has carried the burden of the world on its broad shoulders. A heavy yoke, to be sure, but one that steroids made lighter; the steroid of choice for American consumers was debt. Home equity loans, cash-out refinancing, credit-card debt, and auto loans. It's been a wild ride, but the it's over. The pseudo-wealth created over the last 20 years has begun to unwind, and will increase in speed in 2009.
A permanent psychological change has since occurred. American consumers have lost $30 trillion in value from their homes and investments in the last few years. No amount of fiscal stimulation will reverse this trauma, and the consumer's subsequent retrenching will be felt from Des Moines to Shanghai. Consumer spending has accounted for 72% of GDP; it will revert to at least the long-term mean of 65%.
David Rosenberg, the brilliant Merrill Lynch economist, describes it thus:
"This is an epic event - the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007.Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, that the US housing stocks must fall to below 8 months' supply, and that the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery that is going to require.
"We will probably have to eliminate $2 trillion of household debt to get there, this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets."
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