In previous recessions, dropping interest rates stimulated borrowing on the part of consumers. That made money for banks collecting payments and interest, and borrowers spent their loaned extra cash in the marketplace buying electronics, washing machines, cars – you name it. If Americans have money in their pockets they find ways to spend it. That creates demand and grows jobs. But many consumers cannot borrow now because banks will not lend. If they do hand out a loan, the interest rates are no bargain.
American consumer confidence has fallen to a new seven-month low, partly because of deflated home values and partly because of fear of unemployment. It’s a vicious cycle that the faltering economy knows all too well. Consumers are not buying so businesses don’t order products. Fewer products means fewer workers are needed to produce them. So the shrink cycle goes on until there is a reason for consumers to spend again and stimulate the economy. However, this recession cycle is different.
Despite a recent announcement that the recession was officially over, there is little evidence in the local marketplace that shows evidence of it. But that is still not what is holding the economy back. America is all about consumers; average working class people who take their paychecks and use them to buy goods and services by the millions. If they are afraid that they may lose their jobs and the income that goes along with it, they start saying no to borrowing and buying.
The US economy is self-propelling in both directions. Recessions are fueled by job losses and unemployment triggers even more economic contraction. Interest rate and money supply manipulation by the Federal Reserve had a better handle on supply-side economics in the past. But the consumer is still the boss in capitalism no matter what Wall Street thinks. And as long as people fear the worst, they will keep the economy in check.
Is the Great Recession really over?
Bill Clinton blames bad economy on shrinking middle-class
Distribution of wealth returns to Great Depression levels
The Bush tax cuts explained