Multiplier Effects

If consumers are holding on to record debt (stories here and here and here) how are they going to spend us out of this economic trouble? Maybe it isn’t really over. But if not, are current policies causing a multiplier effect if the economy does dip back to recession?

From what I read, the economy is currently being propped up by what most people seem to agree is a “bubble” in housing prices. So far this housing bubble has allowed consumers to keep spending just enough to keep the economy afloat for now. But if refinancing houses rather than rising incomes is the source of funds to keep up the spending binge, won’t this have a multiplier effect on any downturn? (Economy propped up by housing bubble, spending slows, economy slows, pops the housing price bubble, people stop spending, economy slows more, many lose houses, economic drop accelerates.)

Multiplier effects are worrying me lately. We have had a period where stock prices rather than the underlying strength of the companies became an underpinning of the economy. For example, the pension problem – pension funds invested in stocks, stocks rise, companies don’t have to make contributions, AND their books look better because the pension funds are claimed as assets. As long as the market was going up everyone’s books looked great but now underfunded pension plans will have to drain cash out of companies, lower that previously claimed asset, all lowering earnings, eventually causing the market to go even lower, accelerating any downturn. Same thing with insurance companies – reserves in the stock market, market drops, not enough reserves to cover obligations. As I said, many companies were propped up by their stock prices not their own strength. So when the market drops it multiplies the effect.

By the way, I’m not an economist or an expert, just a worrier. Take a look at this chart and decide for yourself if we are past the stock bubble.