What Economic Crisis? This Is A Confidence Crisis

 By: Michael Lombardi
Let's call a spade a spade.

In the aftermath of our economic crisis, the U.S. government and Federal Reserve pulled out all the stops.

God bless our politicians and our government. Not knowing what to do, most having never been in the situation before, once the U.S. economy collapsed in 2008 our government threw all kinds of money at the economy. They bailed out companies, they bailed out Wall Street, they saved the banks, and they tried desperately to create jobs.

Sure, some will say the government went too far and saved the wrong people, but we are not talking about a bunch of people with economics degrees and years of experience running businesses. They did the best they could. At least they did something.

The Federal Reserve did all it could do, too. Ben Bernanke is an extremely intelligent person. He has studied the Great Depression and Japan's "lost decade." During the crisis, the Fed came up with ideas I would had never thought of. They increased the money supply drastically. They bought U.S. Treasuries. They bought distressed securities...they took drastic action. What else can you ask for?

So, if the government and Fed have done all this, why hasn't our economy turned around? It's a simple answer; human emotions have gotten in the way, big-time. The U.S. consumer has had the fear of God put in them. Many of them have lost their homes, their jobs. We all know someone who either lost their home or their job (or both) during the Great Recession. Consumers have fear in them and, until that fear goes away, the economy will not improve.

U.S. consumer sentiment sits today at its lowest since 1980, according to a Thomson Reuters/University of Michigan consumer confidence index. Consumers are running scared.

Gross domestic product (GDP) in the U.S. is expected to increase an anemic 2.4% in 2012, according to a Bloomberg survey, down from a projected 2012 GDP of three percent only a month ago.

Our economy could be in serious trouble if consumer sentiment towards it does not improve. For years, U.S. consumers did not have any savings. Today, the personal savings rate in this country is approaching the "unheard of" level of five percent. And it is starting to affect consumer spending. According to the U.S. Commerce Department, consumer spending in June dropped for the first time in nearly two years.

But it's not just consumers holding back; it's big corporations, too. American companies are sitting on their biggest cash balances on record. In total, corporate America is sitting on over $1.0 trillion in cash and they are not spending. Instead of investing heavily in plants, equipment and expansion, companies are hoarding their cash, as they too are fearful of more difficult times ahead.

According to the Commerce Department, consumers are sitting on $620 billion in savings. Back in 2005, this number didn't exist. There were no savings. At the rate things are going, and the rate at which fear has been setting in, by the end of this year, consumers and businesses in America will be sitting with $2.0 trillion in savings-money sucked out of the economy. Obama and the Fed can fight the economic downturn all they want, but with consumers and businesses pulling money off the table at such an alarming pace, we are blowing in the wind.

We are no longer dealing with an economic crisis. It has become a confidence crisis. And, until the confidence of consumers-who make up 70% of the economy-returns, the economy will just continue to deteriorate.

What He Said:

"Many of today's consumers have purchased properties with very little down payment. They've been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: the lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems." Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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