June 14, 2008

About Those Tax Rebates?

Nouriel Robini doesn't think the tax rebates are up to the fight for saving the economy from a downward trend. Here's his analysis:

The retail sales figures for May - better than expected - were driven by a temporary factor, the tax rebates, whose influence will fade out by early fall.

Instead, more persistent factors will bear negatively on consumption over the summer and especially the fall:

  • the fall in home prices and the collapse of home equity withdrawal (with their wealth effect on spending);
  • the stressed balance sheets and high debt ratios of the household sector (such debt is up to almost 140% of disposable income);
  • the credit crunch in mortgage markets that is now spreading to unsecured consumer credit (credit cards, student loans, auto loans);
  • the rise in debt servicing ratios (following the reset of mortgage rates, and higher interest rates on mortgages and consumer credit); the sharp rise in gasoline and energy prices that is a serious shock to real incomes;
  • the further erosion of real wages through the rise in the inflation rate;
  • the sharp fall in consumer confidence;
  • the drop in employment (now five months in a row) and thus in income generation;
  • the negative wealth effect of the correction in equity markets and the fall in the net worth of the household sector.

All these factors will have over time a much more significant negative effect on consumption than the temporary boost given by the tax rebates.

[Formatting by me: Roubini laid this passage out in a single paragraph, but I thought it would have more impact if each point was called out separately.]

Posted by Mary at June 14, 2008 09:13 AM | Economy | Technorati links |

I never had much faith in the gimmick of these rebates, which I am still waiting for myself. I figure that it will about cover a tank of gas at this rate.

Posted by: Scott at June 14, 2008 10:39 AM

Just as California utility rate payers saw their bills double and even triple in 2001, the first year of the Bush/Cheney co-presidency, due to Enron (and major Republican campaign donor Kenneth Lay) defrauding energy markets out West, in the final year of the Bush/Cheney co-presidency, the rest of the citizens of our great nation, after seeing gasoline prices at the pump quadruple (with no end in sight) over what they were when Bush and Cheney entered office, are now in the same leaky economic boat as the people in California were sinking in seven years ago.

Why haven't these two creeps in the White House been impeached yet?

Posted by: The Oracle at June 15, 2008 08:04 PM

Mary, all of the factors you list are reason for concern. Luckily for the Bush administration, many of us are too busy noticing just one on a daily basis - the insane rise in the price of gasoline - to appreciate the many facets of the potential economic disaster. Thanks again, Bush team!

Posted by: Flo at June 16, 2008 10:48 PM