Borrowed recovery

Calculated Risk: GDP Growth: With and Without Mortgage Extraction:

Many observers estimate that MEW will fall significantly in the next few years. If so, this will be a drag on GDP as the growth of personal consumption expenditures slows.The two most direct impacts of a housing slowdown are:1) the loss of housing related employment.2) lower MEW and the impact on personal consumption expenditures.

gdp_w_and_wo_mew_2

Source: Calculated Risk

This is a chart to pay attention to. It shows that people have been borrowing on the equity to sustain their consumption, which means the economy will eventually feel a severe constriction on personal spending—borrowing on rising home equity is completely unsustainable.

Compare the 1990s to the 200s and you can see that the whole Bush “recovery” is just more borrowing on the future.

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Author: Mitch Ratcliffe

Mitch Ratcliffe is a veteran entrepreneur, journalist and business model hacker. He operates this site, which is a collection of the blogs he's published over the years, as well as an archive of his professional publishing record. As always, this is a work in progress. Such is life.