Tuesday, April 22, 2008

Ending Conspicuous Consumption

Will the deflating of the Great Housing Bubble be the driver that ends conspicuous consumption? According to a Newsweek article about the The End of Shopping - it just may be. The easy access to cheap debt through credit cards and HELOCs allowed people to purchase anything they wanted and well beyond their means.

Before looking at the article - lets just review the term Conspicuous Consumption. At wikipedia the definition given is "the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status. A very similar but more colloquial term is 'keeping up with the Joneses'."

Let's take a look at the Newsweek article -

Transfixed by turmoil in the financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter century, Americans have gone on an unprecedented consumption binge—for cars, TVs, longer vacations and just about anything. The consequences have been profound for both the United States and the rest of the world, and the passage to something different and unknown may not be an improvement.

People were buying anything and everything. People regularly lived lifestyles that were well beyond their everyday means through debt. Credit cards were the more visible method, but many so many people whittled away their home's equity to finance the consumptive lifestyle.

... To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as the reliable engine for the rest of the economy. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Americans' spending will grow only as fast as income—not faster as before—and maybe a good bit slower. The implication: without another source of growth (higher investment, exports?), the economy will slow.

Just why Americans went on such a tear is a much-studied subject. In a new book, "Going Broke," psychologist Stuart Vyse of Connecticut College argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards (1.4 billion at last count) separate the pleasure of buying from the pain of paying. Toll-free catalog buying, cable shopping channels and Internet purchases don't even require a trip to the store. Pervasive "discounting" creates the impression of perpetual bargains.

The economy has already slowed. The debt was incurred by people across all of the economic classes, even those whose real wages declined. Even with another growth source - like experts - will not benefit across the board. Growth is imagined as always good - but uncontrolled, non-contained growth is not. Like a cancer, this uncontrolled growth of debt was eating away the healthy economy. With numbers like 1.4 billion credit cards for just over 300 million people (actually less than 250 million over the age of 15) - that is more than 5 credit cards per each American adult. And $0.14 per every dollar people make is going to service debts. This type of debt-growth is unsustainable.

... What's notable is that all these forces for more debt and spending are now reversing. The stock and real-estate "bubbles" have burst. Feeling poorer, people may save more from their annual incomes; it's already much harder to borrow against higher home values. Demographics tell the same story. "Life-cycle spending drops among 55- to 64-year-olds"—they borrow less and their incomes decline—"and that's where our household growth is now," says Susan Sterne of Economic Analysis Associates. "After 2010, growth is among the 65- to 74-year-old households, where incomes are even lower."

And credit "democratization"? Well, the message of the subprime-mortgage debacle is that it went too far. Up to a point, the spread of credit was a boon. Homeownership increased; people had more flexibility in planning major purchases. But aggressive—and often abusive—marketers peddled credit to people who couldn't handle it. There are no longer large unserved markets of creditworthy consumers, and, indeed, many Americans are overextended. In 2007, household debt (including mortgages) totaled $14.4 trillion, or 139 percent of personal disposable income. As recently as 2000, those figures were $7.4 trillion and 103 percent of income.

Before people can even enter the savings realm, they must reduce some of this debt. With debt equaling "139% of personal disposable income" there is a long way to go. Any way is going to be hard. Many blogs are pondering which will be more painful - a shallow but very, very long recession or a short but very deep one. What does the Newsweek article ponder -

...But what if the correct answer is "nothing"? Nothing takes the place of the debt-driven consumption boom. Its sequel is an extended period of lackluster growth and job creation. Somber thought. For good or ill, the ebbing shopping spree signals that the U.S. economy has reached a crucial juncture. It will challenge the next president in ways that none of the candidates has probably yet contemplated.

Remember, many people did not have any real growth during the boom - there was consumptive growth due to debt - the debt that has become a cancer on the economy. The Great Housing Bubble just illustrated how bad the cancer has become. The only real questions left are - How bad the treatment to cure the debt-cancer will be? What role did conspicuous consumption play in causing our debt-cancer? And will we be able to change our lifestyles and adjust to the required treatment?

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