Greenspan is right to urge caution that the U.S. economic downturn could last longer and "be greater than currently anticipated." Perhaps he was thinking (but not speaking) about the role played by household debt in the U.S. economy.

On one hand, U.S. household spending is central to the global economy. This follows from the role of the U.S. economy, the world’s largest, as the main buyer of other nations’ products.

On the other hand, the buying power of U.S. households (self-employed, hourly workers and retirees) comes in growing part from borrowed money. U.S. household borrowing increased $539 billion versus the $96 billion increase in personal income during January-March 2001, according to Jane D’Arista of the Financial Markets Center. For every dollar of personal income earned by U.S. households in this year’s first-quarter, they accumulated five dollars of debt.

That trend is a sign of financial fragility in response to the economic turndown. The U.S. economy grew 0.7 percent this spring, the worst rate in eight years, the Commerce Department reported. Is the U.S. economy is reaching the limits of spending based on lending?

Business investments depend on profits. And profits come from sales. The results equal economic growth.

There’s more to this story, to be sure. Significantly, the imbalances between investing, producing and consuming are making people’s lives more precarious in the U.S. and around the world.

Meanwhile, Greenspan knows that U.S. household spending accounts for roughly two-thirds of the nation’s economy, activity driven partly by a rising amount of U.S. household debt. “In the first quarter, outstanding household debt rose to 101.5 percent of disposable income, compared to 100.9 percent in the previous quarter,” D’Arista added.

Beginning in first-quarter 2001 as the debt loads of U.S. households grew, the nation’s economy began to sputter. The implications are global. When the U.S economy sneezes, the rest of the world catches a cold.

Take, for example, how the U.S. economic slowdown is affecting the export-based economies of Asian nations. Singapore is officially in recession. Taiwan and Thailand are slouching towards recession, followed by Hong Kong, Malaysia and South Korea.

In 1997 these “Asian tiger economies” crashed as the U.S. economy kept expanding. Bust and boom. But that was then. Now, the global slowdown is flowing from the Asian nations and the U.S. Big layoffs at U.S.-based firms such as Alcatel, Compaq Computer Corp., Hewlett-Packard, Intel, JDS Unisphase Corp. and Lucent Technologies are cases in point.

The Fed’s policy of cheapening credit for U.S. households is an attempt to maintain their purchasing power as a recession looms large. Yet such a policy will likely increase the indebtedness of U.S. households. However, feeding this financial bubble is what the Fed has determined is needed to keep the national (and global) economy on track—for now.

Borrowed money helping U.S. households float the global economic boat isn’t quite Adam Smith’s “invisible hand” balancing market transactions between buyers and sellers. Mythology is one thing, reality another.

Well, should the Fed’s short-term solution to slow global economic growth be to encourage more U.S. household indebtedness? Or is the Fed fishing in troubled waters? Do we need a new view of the domestic and global economy? The G-8 protesters in Genoa in part are proof that the answers to such important questions shouldn’t be left to the suits in the suites.

Seth Sandronsky, an editor with Because People Matter, Sacramento’s progressive newspaper. ssandron@hotmail.com

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