The McKinsey Quarterly reports on the importance of growing household incomes to facilitate reducing the abnormal debt level (see chart below) without such drastic reductions in consumption.

“In short, the importance of income growth is difficult to overstate. With it, households can simultaneously reduce their debt burden, rebuild savings, and boost consumption. But without significant income gains, deleveraging could undermine consumption and the global economy for years to come. One implication: policy choices that favor productivity and employment growth—critical determinants of income growth—will make deleveraging less painful. Efficiency breakthroughs in sectors, such as health care and government, that employ large numbers of people—but that have not enjoyed productivity revolutions similar to those experienced in industries like retailing and wholesaling—would make a dramatic difference.”

The problem is that in the current outlook there is not much opportunity for income growth for thenext 2 or 3 years.  So… with the consumer’s new need to save, consumption is cliff diving.