Posted by Rob Garcia on Mon, Apr 29, 2013
Just when you thought you could stop worrying about taxes now that April 15 has passed, there’s another new income tax that took effect Jan. 1, 2013. To fund Obamacare, a new 3.8% tax on investment income applies to couples making more than $250,000 and singles making more than $200,000. Investment income such as dividends, capital gains and interest above the $250,000 threshold for couples is taxed at 3.8% — in addition to any other tax that might be owed.
The Wall Street Journal provides some tips on how to avoid the new tax, such as trying to minimize AMT by moving more assets into tax sheltered accounts like IRAs, harvesting losses, spreading gains over a number of years, converting assets to Roth accounts, holding investments until death and even going off-shore. The tax does not affect some investments like muni bonds, though it may affect hedge fund investments.
Welcome to the new world of higher taxes — with some nasty surprises around every corner.
Article printed from NAPA Net: http://www.napa-net.org
Posted by Rob Garcia on Mon, Jan 30, 2012
At its most basic level, a trade takes place when a buyer is willing to buy at a certain price and a seller is willing to sell at that price. Both parties could be smart, experienced, and looking at the same data, yet somehow one party thinks it's a good price to buy and the other thinks it's a good price to sell.
Last week, several news items represented good examples of how investors could look at the same data and draw different conclusions. Consider these:
1. Gross domestic product rose at a 2.8 percent pace in the October through December period.
Bullish investors say that's up from 1.8 percent the previous quarter and the fastest pace in a year and a half.
Bearish investors say it's less than the 3.0 percent growth expected by economists and most of the growth was due to inventory accumulation.
Source: MarketWatch
2. The International Monetary Fund (IMF) cut its forecast for global economic growth in 2012 and 2013.
Bullish investors say fears are overblown as private-sector economic activity in the 17-nation euro zone showed small, but unexpected, growth in January and durable-goods orders were up a strong 3.0 percent in December in the U.S. - the third straight increase.
Bearish investors say just heed the IMF's warning, "Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro-area crisis entered a perilous new phase."
Source: MarketWatch
3. Spanish and Italian bond yields dropped dramatically lately.
Bullish investors say the drop in yields and the strong demand in January's bond auctions suggest the euro zone crisis is easing.
Bearish investors say the Portuguese bond market is now imploding, the Greek restructuring could fall apart, and the European Central Bank's December offer of unlimited three-year loans to banks has simply delayed the inevitable day of reckoning.
Source: The Wall Street Journal
It's differences of opinion like this that make markets. Thanks to the free market, there always seems to be a buyer for every seller - at a price.
Like Joni Mitchell who sang, "I've looked at life from both sides now," we look at the markets from both the bullish and bearish sides and, ultimately, make decisions which we think will best position you to meet your long-term goals and objectives.
Posted by Rob Garcia on Wed, Aug 10, 2011
Do you remember the good ol’ days?
Yes, we’re talking about the four-year period between 1998 and 2001 when the U.S.government pocketed a budget surplus of $559 billion, according to the Congressional Budget Office. By contrast, in the four years between 2007 and 2010, our government racked up a budget deficit of $3.3 trillion. That’s no misprint – it’s trillions of dollars!
The multi-trillion dollar deficits we’ve incurred in the last few years have maxed out the government’s credit limit.
Just like you and I have a limit on our credit cards, the government, by law, has a maximum amount it can borrow. This maximum amount it can borrow is called the debt ceiling.
The U.S.is one of the few countries where the government imposes a debt ceiling. As a result, if we continue having annual budget deficits, then every few years, Congress has to authorize an increase in the debt ceiling so the government can pay its ongoing bills. As you can imagine, this is not a vote Congress likes to make.
If the government doesn’t pay its bills on time, this would be considered a “default.” And, just like humans, if the government stiffs its creditors, it will face consequences. Those consequences could include a reduction in the country’s credit rating and chaos in the financial markets.
This year, the vote to raise the debt ceiling became especially contentious partly because of the Tea Party’s influence. Some Tea Party politicians and others are trying to rein in government spending and are using the debt ceiling issue as a way to make their stand, according to The New York Times.
As the debt ceiling drama plays out, there’s only one way to ensure we don’t have to worry about this issue again – start running budget surpluses and then return the excess tax money to the public!
Posted by Rob Garcia on Mon, May 16, 2011
By: Gillian Tett, Financial Times/CNBC.com
May 9, 2011
Another week, another wave of dismal fiscal gridlock in Washington. But as U.S. politicians squabble about how to cut the debt, another concept with a catchy name is quietly starting to creep into the policy debate: "financial repression."
A few weeks ago, Carmen Reinhart, a U.S. economist who shot to fame two years ago by co-authoring a influential book on sovereign debt, This Time Is Different, produced a joint paper for the International Monetary Fund on the topic of "financial repression" in the west. And while this phrase is not yet mainstream news, it is starting to generate a buzz among the policy elite in Washington and in some European capitals.
The issue at stake revolves around the question of where investors "choose" to put their money. During the past three decades, western savers have generally assumed they could put their money wherever they wanted, since financial markets were organized according to the mantra of globalization and free market capitalism — and thus the price of money (or interest rates) was set largely by demand. But as Ms. Reinhart and Belen Sbrancia, her colleague, point out, this freedom was unusual. In the 1920s, global capital markets were also pretty free. But, from the 1940s to the 1980s, western governments operated capital controls and interest rate caps that restricted financial flows, limiting investor choice.
It is often assumed that these controls were driven by a wave of financial reforms after the 1929 stock market crash (just as governments are implementing financial reforms now). And that is partly true. However, Ms. Reinhart and Ms. Sbrancia argue that these controls also had a crucial fiscal impact. After the second world war, the debt of the advanced economies spiraled to about 90 percent of gross domestic product, roughly comparable to today, which meant western governments desperately needed to find investors to buy the bonds.
One consequence of the controls was they created a captive domestic audience for those bonds. Better still, because these bonds paid a yield lower than inflation, whenever those captive investors bought bonds, they effectively paid a hidden subsidy to the government, enabling them to reduce the debt.
Ms. Reinhart and Ms. Sbrancia argue the world has forgotten that the widespread system of financial repression "played an instrumental role in reducing or 'liquidating' the massive stocks of debt accumulated during World War II." Between 1945 and the 1980s, they say the U.S. and UK's "annual liquidation of debt via negative real interest rates" on average amounted to 3-4 percent of GDP per year, or 30-40 percent of GDP debt reduction over a decade.
These days nobody is talking about introducing overt capital controls or interest rate caps in the west. And central banks appear determined to curb inflation. But some influential investors fear eventually the temptation to let inflation jump above bond yields will reappear. "While the ancient Romans used to shave metal coins in an attempt to monetize debts, our evolving financial system has used more sophisticated techniques (to cut its debt)," says Bill Gross, head of Pimco investment fund. "Bond prices don't necessarily have to go down for investors to get skunked."
Central banks such as the Federal Reserve have already been buying bonds. And there are now some intriguing hints that private sector institutions are being urged to hold more bonds. In the UK, the introduction of financial reforms has forced banks to purchase more gilts. Similar steps are afoot in other parts of Europe and in Washington some policymakers are quietly mulling whether U.S. banks and pension funds could — or should — follow suit, especially if foreign buyers (who own half the U.S. debt) stop buying U.S. bonds.
Such moves horrify some free-market economists, who argue "repression" crimps private sector investments, thus undermining growth. But postwar politicians clearly decided this was a price worth paying to cut debt and avoid outright default or draconian spending cuts. And the longer the gridlock over fiscal reform rumbles on, the greater the chance that "repression" comes to be seen as the least of all evils; at least compared with others that may emerge from spiralling western debt.
Source: http://www.cnbc.com/id/42967280/
Posted by Rob Garcia on Fri, May 06, 2011
The Price of Gasoline
High gas prices have probably been getting your attention as of late. While higher prices have definitely hit your pocketbook and may have altered your driving habits, on a broad level high gas prices are beginning to pose a threat to the current economic recovery. Most alleged experts estimate that the U.S. economy will not be truly threatened unless oil prices reach $140 to $150 per barrel, but whether we reach that point or not, people are still clearly being affected by prices that are nearly three times higher than in early 2009. If prices remain this high it’s inevitable we’ll also soon see higher prices of goods and services subject to transport.
Oil prices have historically risen from Winter into early Summer as demand increases into peak travel season, but this year’s increase has come a bit early and appears to be driven as much by price speculation as actual demand. Keep in mind current oil prices of $114 per barrel are still well off their all-time high of $147 per barrel in July 2008, but that obviously hasn’t kept gas prices from rising above $4 in most areas.
Hopefully, we’ll see some price relief down the road, but given historical patterns we may not get much help over the next 3 to 4 months.
April Market Recap
April was a good month for the investment markets, with the S&P 500 rising 2.85% to close at its highest levels of 2011. We’re having a good year so far in 2011, but it has not necessarily been a smooth ride. The S&P 500 previously peaked on Feb. 18, only to lose 6.86% over the next month. However, the market has since performed well to gain 8.49% since March’s trough.
You will notice that your respective accounts are currently trading at or near their high points for the year. I am currently over-weighting most portfolios in commodities and other asset classes that figure to capitalize on a continuously declining U.S. dollar, while I have largely moved away from “high-quality” bonds, such as U.S. Treasuries and highly rated corporate bonds.
The market is currently overbought, which means that the statistical likelihood of a market pull-back is higher than in a normal market. For those of you with more conservative investment allocations, I have already taken measures to protect your accounts in case of a pull-back. However, just because we’re due for a pull-back doesn’t mean it will occur, which is why we still own equities, commodities and higher yielding corporate bonds, at least for now.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The Standard & Poor’s 500 Index is a capitalization-weighted index of stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Posted by Rob Garcia on Tue, Oct 19, 2010
A McDonald’s Big Mac costs an average of $3.71 in the United States, according to an October 14 article from The Economist. Just across the border in Canada, that same burger costs $4.18 based on the October 13 exchange rate. In the Euro area, you’d have to shell out $4.79 to quench your Mac attack. But, if you’re really hungry, you should forget going to Switzerland because a Big Mac there will set you back a whopping $6.78 at the going exchange rate.
So, a dollar is not worth a dollar when its value declines relative to another country’s currency such as the ones above. The dollar is also weak against the Japanese yen, where it fell to a 15-year low last week, and the Australian dollar, where it fell to a nearly 30-year low, according to MarketWatch.
What’s going on here?
Essentially, the combination of economic weakness in the U.S., extremely low interest rates, and our country’s easy money policy, have conspired to reduce the value of our currency relative to some other countries. And, as our government knows, a weak currency can be a net positive -- as long as it doesn’t get too weak.
According to an October 1 weekly update from Linda Duessel at Federated Investors, “Currency depreciation is the most politically palatable way to deal with both deficits and slow growth. Unfortunately, history suggests depreciating the dollar is the worst possible way to deal with public debt. It spawns inflation, stifles growth and eats away at earnings.”
The relatively weak value of the dollar may not crimp your day-to-day lifestyle right now. However, as an advisor, it’s an important macro indicator that could impact the value of your portfolio -- and your pocketbook -- if it gets too far outside of historical norms. It bears watching.
WHILE THE PURCHASING POWER OF THE DOLLAR can be analyzed using a Big Mac, it can also be analyzed using something less edible -- gold. Gold has been considered a medium of exchange for several thousand years, according to the National Mining Association. And, for some people, it is the soundest “currency” in existence today because it is scarce, it can’t be printed (mined) freely, and it has a long history of being valuable and tradable.
Measuring the value of the dollar in terms of gold is quite simple. All you do is plot the dollar cost of one ounce of gold over time. Back in the early 1930s when our country was on the gold standard, gold was set at a fixed price of $20.67 per ounce, according to The Economist. In the early 1970s, the last vestiges of the gold standard were removed and the price of gold was allowed to reach a “market” price. As of last week, that market price was over $1,300 per ounce.
The rise of gold from $20 an ounce to over $1,300 an ounce was effectively a massive devaluation of the dollar, according to The Economist. Had you bought an ounce of gold in 1930 for $20 and held it to today, you could sell it for more than $1,300. Had you just sat on your $20, it would still be worth $20, but it would buy you less than 1/50th of an ounce of gold.
The funny thing about gold is that it’s not an “investment” in the traditional sense because it does not pay a dividend and it does not generate cash flow. It just sits there and looks really pretty.
Unlike most commodities, gold has no true economic value beyond niche products such as jewelry. So what really drives the price is what the next person is willing to pay- a concept that is theoretically sound, but literally impossible to predict. Gold certainly could climb higher in the shrot term, but histor suggests caution and as seen by the JP Morgan Chart of the Week - as gold prices can rise like a rocket, they can fall just as quickly.
Think About It
“More gold has been mined from the thoughts of men than has been taken from the earth.”
--Napoleon Hill
Posted by Rob Garcia on Tue, Aug 03, 2010
One cause of The Great Recession was the cumulative effect of consumers spending more money than they could afford. Eventually, they got tapped out, business slowed down, and massive layoffs ensued. Of course, simple math says you cannot indefinitely spend what you do not have and, by 2008, the math caught up with many Americans.
Last week, the Commerce Department said the personal savings rate (saving as a percentage of disposable personal income) rose to 6.2% in the second quarter. That’s up from 5.5% in the first quarter. In the heyday of conspicuous consumption back in 2007, the savings rate was a paltry 2.1%, according to CNNMoney.com.
Higher savings is a double-edged sword. On the positive side, it means consumers are acting more responsibly and, by beefing up savings, they are setting the stage for future sustainable economic growth. The downside to this thriftiness is slower economic growth in the short term.
It’s a fine balance between saving enough to get our personal balance sheet back in order, but not too much that the economy takes years to regain its footing. Remember, consumer spending still accounts for about 70% of economic activity, according to The Wall Street Journal. The trick is we still have to shop -- but just not till we drop!
DOUBLE DIP IS NOT JUST FOR ICE CREAM CONES. Over the past few months, concern has grown that the U.S. economy could experience a double-dip recession. Drooping bond yields, which may suggest slower economic growth, coupled with some soft economic data and weak consumer sentiment, have raised a red flag. However, from an international perspective, the International Monetary Fund has raised its 2010 world economic growth projection five times since April 2009 and it now stands at a forecasted rate of 4.6% -- which is rather healthy and certainly not double-dip territory.
Although the likelihood of a double-dip recession still seems small, a July 27 Financial Times article outlined four risks that could possibly derail the recovery:
- A decline in business and consumer confidence.
- An end to temporary boost to post-recession economies, e.g., economic growth emanating from inventory re-stocking.
- A new crisis or “black swan” event that throws the world for a loop.
- Overly austere government budgets that tighten too much too soon and snuff out the recovery before it gets a chance to become self-sustaining.
These risks are reasonable and bear watching. However, let’s face it. No matter how well the world is humming, we (advisors) can always find something to worry about. But, that’s our job. It’s not that we’re pessimists. It just comes with the territory. We worry about things -- large and small -- in an effort to be proactive and to try and help you stay ahead of the curve.
Focus – Think About It
Here’s a list of the happiest countries in the world, according to a recently released Gallup Poll based on data collected between 2005 and 2009. Survey participants were asked to rate their overall satisfaction with their lives and how they had felt the previous day (to gauge their happiness in daily activities).
Rating Country
1 Denmark
2 Finland
3 Norway
4 Sweden
5 Netherlands
14 United States
17 United Kingdom
44 France
81 Japan
125 China
Does this list surprise you?
Posted by Rob Garcia on Tue, Jul 06, 2010
|
Data as of 6/30/10
|
2nd Quarter
|
YTD
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
| Standard & Poor's 500 |
-11.9% |
-7.6% |
12.1% |
-11.8% |
-2.9% |
-3.4% |
| DJ Global ex US (Foreign Stocks) |
-12.6
|
-11.2
|
9.2
|
-12.7
|
1.3
|
0.0
|
|
10-year Treasury Note (Yield Only)
|
3.8
|
N/A
|
3.5
|
5.0
|
3.9
|
6.0
|
|
Gold (per ounce)
|
11.5
|
12.7
|
33.1
|
24.1
|
23.3
|
15.8
|
|
DJ-UBS Commodity Index
|
-4.8
|
-9.7
|
2.6
|
-9.5
|
-3.8
|
1.8
|
|
DJ Equity All REIT TR Index
|
-4.1
|
5.4
|
53.6
|
-8.8
|
0.4
|
10.2
|
STOCK MARKET RALLY FALTERS ON "MACRO" ISSUES
The stock market rally that began in March 2009 came to an abrupt halt in the second quarter. Despite excellent first quarter corporate earnings in the U.S., investors fretted about larger issues that could overwhelm the economy in the months ahead. These "macro" issues include unsustainable government debt levels in numerous countries, the unwinding of stimulus spending, possible deflation, persistently high unemployment, financial regulation, and a government-orchestrated economic slowdown in China, according to The Wall Street Journal, June 30. These concerns helped send the S&P 500 index to an 11.9% decline in the quarter.
Second Quarter Country Returns Based on the Dow Jones Global Indexes
Ranked by U.S. Dollar Performance
Winners
|
Sri Lanka
|
25.7%
|
|
Peru
|
5.9
|
|
Philippines
|
5.8
|
|
Iceland
|
4.6
|
|
Indonesia
|
3.4
|
Other Notables
|
Greece
|
-39.3
|
|
Spain
|
-22.3
|
|
France
|
-20.5
|
|
Brazil
|
-14.8
|
|
U.K.
|
-14.0
|
Source: Dow Jones Indexes
ECONOMY SLOWS DOWN
A variety of economic reports over the past few weeks suggest the economy is slowing down. For example, home sales dropped, consumer confidence slumped, manufacturing growth cooled off, and new claims for unemployment insurance remained high, according to Bloomberg, July 3. However, let's not get too carried away. A slowdown does not necessarily mean we are headed for another recession.
Today's weak economy puts policymakers in a tough spot. Normally, fiscal and monetary stimulus is enough to jumpstart growth. Unfortunately, we've shot those two rockets and we still haven't reached escape velocity. If the economy rolls over from here, the question becomes, "Where do we find a third rocket?" According to Tony Crescenzi, strategist and portfolio manager at Pimco, CNBC.com, June 7, our third rocket might consist of time, devaluations, and debt restructurings. If fired, this third rocket could be painful for many Americans.
INTEREST RATES DIVERGE BASED ON RISK PERCEPTION
As the stock market declined, yields on U.S. government securities declined, too, as investors fled to the perceived safety of our government paper. During the quarter, the yield on the 10-year note declined from 3.8% to 3.0%, according to data from Yahoo! Finance. This decline in yield occurred even though the government issued more than $300 billion in new debt during the quarter, according to The Wall Street Journal, July 1. It was a different story in the corporate bond arena. Yields on investment-grade corporate bonds and high-yield corporate (junk) bonds rose as investors began pricing in added economic risk. In a sign of growing risk aversion, the spread between yields on corporate bonds and government bonds rose significantly, as investors required a higher yield to hold the potentially riskier corporate bonds
THE DOLLAR REMAINS POPULAR
Some naysayers think the dollar's days are numbered, but that countdown had yet to begin in the second quarter. The dollar index, a measure of the dollar's strength compared to a trade-weighted basket of six other currencies, rose a solid 5.9% in the second quarter, according to MarketWatch, June 30. Two major trends are apparently tugging at the dollar and in any given week, one trend seems to outweigh the other. The euro zone debt crisis helped spark a flight to the U.S. dollar and was a major reason why the dollar jumped sharply in the second quarter. However, toward the end of the quarter, disappointing economic numbers out of the U.S. and new austerity measures in the euro zone led some investors to rethink their dollar-haven strategy.
SUMMARY
The recovery from the recession hit a rough patch in the second quarter as several economic indicators turned soft and the stock market turned south. It's too soon to tell if this is the start of a new leg down or simply a pause that refreshes. Either way, we continue to do our best to help you reach your goals.
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
Posted by Rob Garcia on Mon, Jun 28, 2010
It's no secret that many countries are incurring large--and unsustainable--budget deficits. What's interesting is the approach each country is taking to try to lower their deficits to a manageable level. Britain, Japan, Germany, and Greece, for example, are focused on cutting government spending, according to Bloomberg, June 22. Conversely, the U.S., while concerned about government spending, seems more focused on keeping the stimulus spending alive and raising taxes until (hopefully) the economy can catch fire and grow on its own.
Who's right?
According to Harvard University professor Alberto Alesina, "There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don't quite get it."
In addition, a study by Ben Broadbent and Kevin Daly of Goldman Sachs Group, Inc. as reported by Bloomberg on June 22, "discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point." And, from a stock market perspective, the same report said, "The equity markets of the countries that sliced spending beat those of other advanced nations by 64% during a three-year period."
Like many things related to finance and economics, we won't know "who's right" until time passes and the market delivers its verdict. Between now and then, expect the vigorous debate on spending cuts versus stimulus spending to continue among academics, investors, and world leaders.
Posted by Rob Garcia on Mon, Jun 14, 2010
Which country is the most attractive market for investors?
Perhaps Brazil? Russia? India? China? Collectively, those four are known as the "BRIC" countries and for a number of years, many 
investors have pointed to them as economic stars. However, in a global quarterly poll of investors and analysts who are Bloomberg subscribers released on June 8, "Almost four of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead." That placed the U.S. #1 on the list followed by Brazil, China, and India.
Of course, this is simply the opinion of a group of investors and analysts and it does not mean that the U.S. will turn out to be the best market. But, it does raise an interesting observation, which is... there are countries with good economics and countries with good investment opportunities--and they are not always the same.
Here's what we mean. In the first quarter of 2010, Brazil, India, and China's economies expanded at an annual rate of 9.0%, 8.6%, and 11.9%, respectively, as measured by gross domestic product, according to Bloomberg. That's huge. By contrast, the U.S. economy expanded at a relatively modest 3.0% in the first quarter, according to the Bureau of Economic Analysis. On the surface, you might think that the three countries with the highest economic growth rates would also present the most attractive investment opportunities. Possibly yes, but the latest survey from Bloomberg put the good ol' USA in the #1 spot.
Why would these investors and analysts put a slower-growing U.S. ahead of fast-growing Brazil, India, and China? There could be numerous reasons, but a simple takeaway is this--in the short-term, good economics does not always translate into good investment opportunities. For example, if the fast economic growth in Brazil, India, and China was already "priced into" their financial markets, then the near-term outlook for stock prices might be muted. Conversely, if the modest growth in the U.S. helped drive our stock prices down to a relatively low level, then we might be in the best position to experience a bounce from this "oversold" condition.
This is a long-winded way of saying short-term market movements might not reflect current economic realities.
DID YOU FEEL WEALTHIER in the first 3 months of this year? Well, believe it or not, the net worth of U.S. households rose by $1.1 trillion in the first quarter, according to the Federal Reserve. Most of this increase came from rising stock prices. And, if you believe economists, each extra dollar of wealth should generate about 5 cents of spending over time, according to MarketWatch. Dubbed "The Wealth Effect," it suggests that rising stock prices could lead to a virtuous cycle of higher spending, higher corporate earnings, and higher stock prices. That's the good news.
Here's the bad news. The theory also works in reverse.
Yes, household net worth was up in the first quarter, but it is still down about $11.4 trillion from its early 2007 peak, according to MarketWatch. And, with the roughly 7% slide we've seen in S&P 500 so far in the second quarter, we may see the net worth number drop when the second quarter data is released in a few months.
This net worth data and the stretched balance sheets of many Americans leaves us with a conundrum. On one hand, consumer spending accounts for about 70% of U.S. economic activity, according to Associated Press. So, if we want robust economic growth, we need consumers to open their wallets and start buying stuff. On the other hand, the pragmatic observer says consumers are already too much in debt and need to curb their spending and build up their savings. This could lead to slower growth.
Essentially, we can keep spending by going deeper in debt and hope we can "leverage" our way to prosperity. Or, we can cut our spending, increase our savings, and gradually build our way back to a sustainable growth rate. Both scenarios would likely cause some pain. The former scenario would likely delay the pain. The latter scenario would likely speed it up.
Sooner or later, don't be surprised if we enter an "Age of Austerity" that enables (forces?) consumers to reduce their debts, and, after a painful adjustment, puts our country back on a path to prosperity.