This past Monday, Stanley Fischer, the official who took over as Vice Chairman of the Federal Reserve in June, commented that the weak economic recovery might simply be continued fallout from the financial crisis and subsequent recession. However, “it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy.â€
The idea of a “structural shiftâ€Â is a key point that I repeatedly addressed over the past several years as the economy has continued to “struggle through.â€Â  To wit:
“Post WWII, the U.S. was the epicenter of production and manufacturing for the majority of the world as war torn Europe, and Japan was rebuilt. However, post-1980; the collision of a structural shift in manufacturing, the rise in financial engineering and the age of ‘consumerism’ changed that dynamic. As can be more clearly seen in the chart below, the surge in consumer debt was used to bridge the gap between declining wage growth and an arguably unrealistic high standard of living.â€Â
The rise of the consumer society is a crucial point that continues to be missed in the ongoing arguments that try to explain the inability of the economy to achieve lift off. Let me explain.
In any economy, there is a crucial link between production and consumption. In order for consumption to occur, production must come first. Simply, an individual has to go to work and produce something, which can be consumed by others, in order to receive wages that allows for personal consumption. In turn, economic activity can be directly traced by personal consumption expenditures as shown in the chart below.
This is not surprising in an economy that is nearly 70%Â (68.25% to be exact)Â driven by personal consumption expenditures.
What is important to notice is that while real PCE as a percentage of GDP has risen sharply since 1980, it has been a function of increasing debt levels and weaker economic growth rates as shown in the first chart above. However, let’s look at this a bit differently.Â
