Thanks to years of bad policy, consumers have been encouraged to consume. In recent years the typical figure for spending among all Americans is around 106% of their income. Obviously that is unsustainable. As regular Americans cut back and budget, it's going to be interesting to see how they react to both the Wall Street bailout as well as the excessive executive compensation plans. Meanwhile, regardless of how traders are reacting today, there are some very painful issues still out there for American families. There are no easy answers and anyone who says otherwise is a liar.
Merrill Lynch's Rosenberg said that in the fourth quarter of 2007, Americans' household debt almost equaled 140 percent of their after-tax income and that they were spending 14.3 percent of their after-tax income paying down that debt.
"Simply put, that means Americans are spending more on servicing their debt than they do on food," Rosenberg said. "This is not just affecting stressed-out or soon-to-be-foreclosed home owners. This hurts everybody."
Rosenberg predicted Americans will start saving more, which he said will shave 1 percentage point off annual U.S. consumer spending growth for years to come.
"It is hard to say how bad things will get," Rosenberg added. "We're in unchartered territory at this point."
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