Economist Scott Grannis writes in his blog Calafia Beach Pundit – Retail Sales and Supply side economics. 10/14/11
The continued strength in retail sales also shows that consumers in aggregate can spend more even as they deleverage. In the chart above, note that households’ debt burdens (consumer and mortgage debt payments as a % of disposable income) have declined dramatically since just before the recent recession, by about 20%. This is the biggest effective deleveraging of the household sector on record. In a sense, you could say that, based on this chart, the consumer debt bubble has burst, and we are back to levels that in the past have served to launch significant economic recoveries (e.g., 1983, 1995). Of course, some portion of this deleveraging is the result of massive defaults on mortgage debt, but it still shows that debt can be cut back dramatically without causing an economy to shrink.
One comment on Scott’s blog noted that the underground economy may also be a source of economic strength. High unemployment and generous benefits may be driving a lot of income off the books. Yet even these people spend money. It makes a case for a consumption tax to be able to collect taxes from the underground economy. It also allows you to collect more from people who may have low income temporarily, but have savings that allows them to participate in the retail economy.