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Friday, March 11, 2011

Is Consumerism Dead?

Lately, as we the economy slowly claws its way back to some semblance of growth, we are hearing an interesting mix of marketers, political pundits, psychologists, financial counselors and columnists all saying the Great Recession has changed Americans permanently.

The idea is that the wild consumption binge that many Americans have been on for the last few decades has come to an end. This morning we hear that the savings rate is now at 5.8 % which is way above pre-recession levels of zero-1.5%. Many say that hard work and thrift are making a comeback as we return to old values and rely on collaboration to solve problems and now clearly see the failings of the old status symbols.

I am not so sure that is what is happening. If a few years from now the economy is booming will people revert to their old spendthrift ways? It is not clear to me where we will go.

For a moment, let us look at the facts of the Great Recession. Unemployment doubled and is now at 8.9% but almost everyone admits that the real rate is much higher as millions of discouraged citizens have given up looking for work. From late 2007 through 2009 an amazing 13 trillion dollars of wealth evaporated in the U.S. Besides unemployment soaring, 401k plans shrunk, roughly a third of the equity in homes disappeared and, amazingly, some one quarter of all mortgaged homes were under water (meaning current value of home was less than existing mortgage balance).

The spending that went on was amazing. Take housing. In 1950, the average U.S. home being built was 983 square feet. By the end of 2006, it was at approximately 2,350 square feet. Buy a house, everyone seemed to be saying to young people. It can only keep going up in value. And, by 2007, mortgage equity withdrawal, where people refinanced with a cash out option on their equity line of credit, actually was 9% of the U.S. disposable income! Looking at it another way, in 1982, a recession year, household debt was equal to 44% of Gross Domestic Product while by the end of 2007 it was actually over 100%. You did not have to be financial genius to see that this was not sustainable but if you talked about the dangers of it you were dismissed as a Cassandra.

Now, it is clear that many people are not going back to their old spending habits. If you are permanently unemployed or under-employed, you have to had to make painful lifestyle shifts. Your days of using your home as a veritable ATM machine or super credit card are over. But for those who still have decent jobs how long will this new austerity last? When will greed overcome fear?

Clearly, people are still nervous. Yet, I remember when gas briefly touched $4.00 a gallon in summer 2008 when oil topped $146 a barrel. You could not give an SUV away. But several months later when oil cratered to $33 per barrel, the SUV’s flew off the dealer lots with an abandon again. Now, as gas at the pump moves up due to Middle Eastern political tensions, the pattern seems to be repeating itself.

Unless you are in advanced old age, the Great Recession is easily the worst financial calamity that you have witnessed in your lifetime. The Great Depression of the 1930’s psychically scarred our parents or grandparents. They became more frugal and, for the rest of their lives, were net savers and cautious investors. Was the Great Recession a similar event for ALL of us?

Are we truly moving from a credit to debit society? Is the old cliché about the Indestructible American Spirit that is infinitely resilient and able to turn any hardship into opportunity still valid?

I remain on the fence. Long term we need to address our entitlements that will take the entire economy down in several years unless we have reform in the Social Security, Medicaid and Medicare plans. But with stocks up 80% from the March 2009 lows, is the “wealth effect” kicking back in among the affluent? So far, the ostentatious displays of wealth that began in the 1980’s and lasted nearly 25 years have been muted.

Our business, however, seems to be ignoring the trend to austerity if it really has legs. TV programming still goes toward the glitzy and the idealized lifestyle is one great material comfort. Do you see a resurgence of programming like “The Waltons” or “Little House on the Prairie” that epitomize the return to honesty, fairness, and authenticity that many say are reappearing in American life these days as a result of the recession?

All of us want a return to vibrant prosperity. Will it be built on our newfound savings and realism about entitlements or will it be a return to the house of cards that we built with plastic in recent decades?

I only know this for sure. Markets always go to extremes and they are full of endless volatility. As consumers get more in charge in our digital age, they are also harder to predict. But, human nature does not change. Much of me hopes that the new thrift is permanent. Recovery will be slower but it has a chance to be longer lasting than that of the era of consumerism.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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