What Happens When Savings Is Already Negative, And Then Credit Shrivels Up?

You cut spending, or cash in assets. Or you steal.

I have to give credit to Paul Kasriel, who has been beating this drum for months - or years. He has done several walk-through essays, loaded with charts and visuals, which basically show the following:

We spend more than we earn. (negative savings rate - or very close to it, depending on when you look).

This is possible because we have been liquidating our home's equity via Lines of Credit (HELOC).

Now that home values are falling, we are losing the equity before we can spend it.

Furthermore, banks are less likely to allow access to equity, even if it is there.

Bottom line: we have to cut back, sell other assets, or steal to keep things going. So if we have not yet cut spending, we are still living off of increased borrowing, or we are liquidating other savings. None of these are good trends for the long-term. This is why our economy is due for a slowdown, recession, etc. We've been on an unsustainable path. Check out some of his recent write-ups. Including the most recent one, which is a re-issue of a 2005 essay.