The End of Credit Card Consumerism
A new frugality could remake the U.S. economy—and American life
When it comes to longevity, few royals can top America's King Consumer. For more than four decades, our shopaholic nation has shown an insatiable desire to spend until our credit cards melt. And throughout this era, consumer spending has, well, consumed a greater and greater share of our total economy. Only twice since 1965, despite half a dozen recessions, have Americans spent less in a year than the previous one. Indeed, it often seems that we have defined ourselves by our ability to buy supersized everything, from McMansions to tricked-out SUVs to 60-inch flat-screen televisions—all enabled by decades of cheap credit.
On the surface, it may seem that there's nothing wrong with all that conspicuous consumption, especially for the biggest, most productive economy on the planet. After all, our undying love of stuff has helped fuel a global economic boom. Yet today, America finds itself at a once-or-twice-a-century economic tipping point. A sharp slowdown, record-high gas prices, high consumer debt levels, a plunging real estate market, and the growing green movement all seem to be conspiring to dethrone King Consumer and transform the economy and the American way of life for years to come. "The process of bringing our wants and our needs into realignment," says Merrill Lynch economist David Rosenberg, "is going to involve years of savings and frugality." Or, to put more it more simply, "there is an anti-bling thing going on," says Marian Salzman, chief marketing officer of Porter Novelli.
Party's over. Many consumers, of course, don't have much choice but to scale back. Total credit card debt has increased by over 50 percent since 2000. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian, and the personal savings rate has hovered close to zero for the past several years. High gas and food prices are causing real incomes to fall. Even worse, rising inflation will probably cause the Federal Reserve to start jacking up interest rates once the credit crisis on Wall Street has passed, tightening credit even further. "We're shedding jobs, it's much harder to borrow, and what used to be capital gains are now capital losses," says Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "There's no source of funding for spending." Because many of us won't be able to as easily use our homes as ATMs, Hoyt expects to see an upward trend in saving and slower growth in consumer spending, compared with the binge of the past decade.
It was our appetite for housing, after all, that served as the catalyst for the multidecade consumer boom. Consider this: Consumer spending has risen to just over 70 percent of the U.S. economy from a bit more than 60 percent in 1965. The pace really picked up in the 1970s, when the first baby boomers started buying and furnishing their own homes. But now, Rosenberg says, the median boomer is in his early 50s and looking to unload his fleet of leased SUVs.
To some degree, then, demographics are destiny. Longer term, an aging population will need to spend less and save more for retirement. As that process plays out, consumer spending may become less important in the big economic picture. Moody's Economy.com forecasts that the combination of demographic and financial factors will cause just such a seismic economic shift. Reversing a four-decade ascent, consumer spending could actually start falling as a percentage of U.S. gross domestic product, slipping to 68 percent over the next seven years.
Shopped out. And this new frugality might actually be OK with many of us. Consumers were "so glutted on everything that they had acquired and all the time that was robbed from them...that they almost saw this [downturn] as a great opportunity to stop," says Faith Popcorn, chief executive of her eponymous consultancy. In a recent survey, she found that 90 percent of respondents said they were considering options for "the simpler life," and 84 percent said they were inclined to buy "less stuff."
Another survey found that people rank being in control of their finances and living a green lifestyle higher as signs of success than having money or a luxury car, and view having a paid-off mortgage as more of a status symbol than having a beautiful home. "We have to convince ourselves that the lifestyle we can afford right now is a desirable one," says Holly Heline Jarrell, a global director at the communications firm Manning Selvage & Lee, which sponsored the survey.
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Reader Comments
Opportunities in the Present Credit Crisis
We have seen over the last few years a financial crisis unlike anything seen since the Great Depression. The American people are in nearly $1 trillion of credit card debt, $3.3 trillion in consumer debt (all debt excluding mortgages) and if we throw mortgage debt in we are at $12 trillion. To put things in perspective, when Bill Clinton was running for office in 1992 the call to arms was formed around our national debt, the debt our nation owed other nations, which was published at that time to be $3 trillion. Now our consumer debt is there and one third of that is credit card debt. As a nation we have become like a ravenous animal with a tape worm and the only thing that satisfies is our consumption of more goods. We have become insatiable with materialism and have become a freight train of spending with no engineer, going 100 miles an hour off the track. In 2005 18% of sub-prime borrowers defaulted on the very first mortgage payment (The Debt Advocacy Center). There were 1million foreclosure filings last year and 400,000 in the first quarter of this year (National Realtor Association). On top of all that Bankruptcy filing were up 38% in 2007. This all sounds very gloomy and it is, however it is not hopeless. We also have an opportunity to make changes in our lives, get out of debt, help others do the same and as a nation we can become stronger through this. However, the individual must act with sound judgment, discipline, conviction and perseverance. We must get ourselves out of debt and the faster the better.
There is basically two types of debt, unsecured and secured. Unsecured debt is anything that has no tangible item that can be taken as collateral. Credit cards, medical bills that are in collections etc. Secured debt is home mortgages, car loans, boat loans etc. In terms of eliminating debt you always want to eliminate credit card debt first. Why? It uses compounding interest to determine your payout as compared to simple interest. Mortgages are calculated by simple interest. If you had a $100,000 mortgage over 30 years you would pay back at the end approx. $165,000. The same amount on a credit card would calculate to nearly 40 years and approx $250,000. Why? Because of the difference between simple interest and compounding interest. Bottom line, we need to get rid of credit card debt. The banking industry has enslaved the American public through credit cards. We need to take the proverb "the borrower is a slave to the lender" to heart and be debt free.
Part of the problem is there are so many sharks out there how can anyone know what is a wise choice for help. If you are behind in unsecured debt and need settlement, there are plenty of companies out there to help, the only problem is they want to charge 10% to 15% of your debt before they do anything for you. If you owe $15,000 you have to come up with $2,250. Heck, if I had that kind of money I wouldn't have the problem and wouldn't need their help. Bankruptcy is an alternative, n
2008...THE YEAR THAT WAS!!
As a small business owner, it truly has been a year of change, mainly for the worst. And if you are not on a scale of 7 to 10, which I mean a business that is dealing with the wealthy class,it has definitely been a severe uphill battle. The old saying "money comes to money" is truer these days then it ever was. And if you are a business owner these days that caters and deals with the lower to medium income class of people, then you truly must really be feeling the affects of the downturn in spending, and even customers patronizing your business. Sad that the small business owner is becoming a thing of the past, as I believe that many, if not, most, will not survive the economic onslaught. We have been active in our small family run business for over 25 years, and have even moved our business place to what we thought was a "better location." NOT a good move! BAD timing! The hole has become deep enough for us to become very concerned. Yet, many competing businesses who have wealthier clientele are "thriving." It makes me wonder about the "rift" between the middle class and the rich, as it seems to have widened tremendously. My conversations with other small business owners are similiar to ours where they are in the midst of a struggle for survival. In all our years in our business, I never imagined that maintaining "break even" would look so good!
ttes of NV
We have freedom of choice but it is limited by freedom of wallet. You can drive any gas guzzler you want, but it's not up to the rest of us to insure you have cheap gas. For that you are limited by your own wallet.
You also don't have freedom to kill people, kick cops in the shins or do any number of other things. Freedom comes with responsibility.
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