The key to recovery is getting America to spend again, economists say. That means people have jobs with reliable incomes and financial institutions resume lending so that businesses can expand and grow. In your typical recession, people lose jobs and when they are hired back, the economy reignites as they begin spending more. This time is different. And nobody talks about it or wants to face up to it, because maybe that's just too depressing.
 
The difference in the 2008-2009 downturn is that so many people, businesses, financial institutions and the government for that matter are in hock. America's recent affluence was based on a mirage of borrowed capital and we certainly borrowed prodigiously on all fronts figuring asset values would keep going up to cover our obligations. For several years borrowing levels even exceeded people's incomes on average and we all forgot about savings. Now the capital mirage has disappeared, but the debts haven't. And since savings levels have been so low, many people don't have any cushions to get them through the current period--their debt holes grow deeper by the day. Even worse, 401Ks have been hammered in the stock market collapse and pension plans terminated by organizations looking to buttress flagging balance sheets--prospects for comfortable retirements vanish for many babyboomers.
 
So now when government stimulus kicks in, the tax rebates and jobs income will go to paying down debt from mortgages, credit cards, and auto loans. Many people will still need to sell their homes or give them back to banks, deflating the housing market for some time to come. And given so many people put so little equity down in the recent buying binge why should they keep feeding mortgages when their home values are well below mortgage values?
 
Shell-shocked folks suddenly won't be rushing out again and spending on new homes and more stuff to put in them any time soon. Our new reality will be deleveraging and recapitalizing, a process that may take many years. I know a woman whose family had been living large in the capital mirage. Her parents had grown up in the Depression and had been very frugal. "I resented it when I was growing up, I thought they could be buying us more things," she related, "but they saved instead, I never understood it until now. I'd do anything to have the peace of mind that they had from saving. I get it now, but I learned too late." 
 
The shift is on from a psychology of spending to a psychology of saving. People are grasping to live within their diminished circumstances, giving up trappings of affluence.  And while the government can print money and ratchet up the national debt for stimulus, people have lost their appetites to borrow and banks, the broken engines of the capital mirage, won't be lending to the credit-compromised. Ultimately the country will need to shrink the government debt burden too--(that's all about higher taxes, but we discussed that a few weeks ago)
 
 Peace of mind has its own considerable value, but it also has a cost.