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Where Have All The Consumers Gone?

Where Have All The Consumers Gone, Long Time Passing

It is common knowledge that 66% of our economy, as measured by the Gross National Product (GNP), is driven by consumer spending. What do you think consumers will do, and should do in the future? Consumers will not be consuming the way they were prior to the collapse of the economy and below are just two reasons why this recession is not going away quickly.

A major, respected, bank concludes that the housing crisis is far from over and consumer's net worth will continue to be hit hard. In addition, three well respected economist believe that a significant number of major banks are "zombies" and will need to be closed down and liquidated in an orderly fashion. This also will get the attention of consumers and cause them to think twice before spending; rather than saving for troubled times.

Based upon the projections of Duetsche Bank's Global Market Research study dated August 05, 2009, the U.S. housing market is still in a steep decline. The entire study can be read by clicking on their logo below, however their conclusion is summarized by the quote after the logo.

"The continued decline of U.S. home price will contribute to rapidly rising rates of negative equity. We project that over the next two years, an additional 11 million households will be underwater, bringing the total to as many as 25 million households. The most obvious implication is for mortgage defaults; borrowers with negative equity may be forced to default after a life event (e.g. unemployment, underemployment, divorce, disability, etc.). Borrowers may also “ruthlessly” or strategically default even without such life events. Apart from default, this reversal of fortune for the middle class will surely suppress consumption. In the meantime, we don’t expect a quick turnaround of the housing market due to the weakness in labor markets, excess supply and continued un-affordability in some regions."

In addition, three top economist believe that many of our major banks are insolvent and need to be taken over by the government, cleansed of their toxic assets, and put back in the hands of the private sector after they are once again in good financial shape. The video to the left is a discussion by the three scholars of what they believe must be done. It is 10-minutes long and worth watching.

If these events happen, the consumer is not going to be in any mood to ratchet up his spending and be the engine that quickly puts us back on the road to recovery.

Based on these factors, it is not realistic to expect that the economic recovery, along with a drop in the unemployment rate, will be happening soon. It will take several years, and maybe decades, before the consumer will start consuming at his pre-recession pace.

For the sake of the long-term future of this country; the consumer is making the right choice of saving rather than spending. We must become more than a consuming nation.

Disclosure: NA