While reading a recent Washington Times article I was struck by this quote:
“Americans were more traumatized by this recession than any in the past 80 years,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “They suffered historic losses in personal wealth and watched helplessly as employers were firing workers at a pace not seen since the Great Depression.”
About the same time a savvy journalist asked me the following two questions:
1. Do you think the spending less/saving more trend will really linger over the next several years? Or will it be like post-9/11 America, where everyone suddenly took stock of what was most important in life for a year and then went back to their old ways?
I believe it will linger – if for no other reason than current market forces will prevent us from returning immediately to our consumptive ways. Over the past 10 to 15 years we Americans lived well beyond our means. We spent more than we earned year after year, using home equity loans and credit cards to make up the difference. We deluded ourselves into thinking we didn’t need to increase our personal savings rate because our homes and stock portfolios were appreciating at such a rapid clip that we were “sure” those investments would feed us in our golden years. With the tightening up of the credit markets we will be FORCED to save whether we want to or not. Personally I think this is a good thing. In the go-go years there were too many of us working at jobs we didn’t like to make money for things that didn’t bring us happiness. My hope is that this downturn will enable us as a society to rethink what is the right balance between work/life/money for each of us.
2. How about credit card abuse and taking on mortgages we can’t possible afford? Have we learned our lesson, or will people continue to rack up debt they can’t handle well into the next decade?
Credit card abuse and mortgage mania is on the downturn – if for no other reason than access is being denied. What I worry about now is the next financial bubble. Will it be student loans, annuities, or long-term care? In the new world order many decisions that used to be made by government or employers (e.g. health care and retirement savings) will be made by individuals. If we don’t choose wisely going forward, we may step in new financial potholes. The Obama administration has proposed a consumer protective agency that would increase disclosure for financial products. But we individuals have to pick up the ball as well. We all need to commit to self-educating more about our money. Financial literacy is a must for our free market economy to function efficiently going forward.
What do you think the new American consumer will look like – have we been permanently traumatized or positively tamed?