Personal income edged up slightly in January, and spending by individuals rose for a fourth straight month, according to government data released Monday.
What the headline fails to reveal is the growing instability between personal consumption and income. Personal consumption to income has risen to a record high of 84.8% in 2010 despite rising unemployment and income stagnation. This is a far cry from 74% recorded in 1981. The most recent ratio has exceeded the old record high of 84.7% posted only five years ago. Either Americans are truly reckless consumers, or they, struggling to keep their heads above water in troubled economic times, find themselves spending increasing amounts of their personal income on basic, survival consumption. I tend to view the rising ratio more as the latter. How much of personal income can be devoted to consumption – 85%, 90%, how about 100%? The higher the ratio goes, the more unsustainable it becomes. Soon, no amount of entitlements will delay the inevitable – a serious drop in consumption relative to income. This reality reveals the seriousness of the problems (both economic and social) facing the domestic and global economy.
Personal Consumption As A % of Personal Income or "Real Funding Pool":
Source: money.cnn.com
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