Friday, September 09, 2005

Will Katrina Blow the Global Economy off course?

One question that will be important in the coming weeks and months is: how will Hurricane Katrina affect the mindset of indebted American consumers? These consumers have been spending more than they saved for many years and this has helped to drive the global economy along.

Couple a relatively high level of debt and the high proportion of uninsured homes destroyed by the Hurricane and you have a recipe for long-term misery as consumers try to craw out from under the additional mass of debt.

Either they will be forced to cut discretionary spending and pay off debts, or they’ll go bankrupt and the problem will more immediately be the banks. The process will be alleviated to some extent by government projects to rebuild. But the incerased cost of gasoline,as Americans come closer to paying European prices, will also have a damping effect on the economy.

But the Hurricane has considerably reduced the capital of a large part of the United States. Something tells me we will all pick up the tab.

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