When I started this blog, back in May 2008, I dedicated many posts to the “culture of consumption” or consumerism. Here are some of those early blog posts:
Consumerism and Fascism (July 10, 2008)
Carneval Consumerism? (July 21, 2008)
Consumer Cathedral (August 2, 2008)
The Core/Void (August 6, 2008)
The Selling of the President (August 8, 2008)
Sexism and Motherhood (September 26, 2008)
But on September 15, 2008, the world changed. Our delusions caught up with us. The question is, have we learned, are we going to move beyond a consumer-oriented culture? If you’ve been following the national news, you might know that within a few years the public or government debt to GDP ratio will hit 90%. That is seen by many as dangerous, threatening inflation and future financial stability. However, before we start getting self-righteous about government debt, our private debt is already at 100% of GDP. In 1980 it was only 50% of GDP.
Think of that. In thirty years we spent $6 trillion or so on credit to sustain what appeared to be an ever growing economy. Scan news stories over the past ten or twenty years about the economy, and one hero stands supreme: the Consumer. When times are rough, the consumer keeps spending. When the dotcom bubble burst, the consumer saved the economy. When al-Qaeda attacked, the consumer did not back down. 70% of the economy was driven by consumption, and as long as the consumer was spending stocks and then real estate prices could keep rising.
Unfortunately, it was prosperity built on sand. Or, literally, on debt. The debt to income ratio on private debt rose from 40% in 1950 to over 120% by 2006. That is why it was inevitable that the boom times would end. The drama in September 2008 caught the country off guard as we literally stared in the face of a looming Great Depression. If not for quick government action to secure credit markets, we could be living in a global depression with unemployment twice what it is now. However, the transition to a sustainable economy will not be easy.
Here is the problem: we are in a recession, and with the majority of the economy being consumer spending, we need consumers to come back and spend in order to increase demand and bring back growth. However, consumers can’t do that without borrowing. Not only would increased debt cause more harm than good, credit markets are now tighter, making it harder to ‘borrow and spend.’ Therefore, demand is being stimulated by government spending and infrastructure investment. This increases public debt, but is arguably necessary to get the economy moving. But if debt-driven consumerism is not going to drive the economy in future years, what will?
The question has global implications. US consumerism helped countries like China modernize and industrialize. China finances US debt at relatively low interest rates in part because it doesn’t want to lose US consumers. If it appears that the US consumer is not going to buy as much as before, China would shift its interest to other markets, and decrease its purchase of US bonds, and perhaps dump US currency. That would hurt the US economy, so American officials can’t advocate cutting consumption of Chinese goods. But the Chinese also know that the US can no longer sustain the consumption patterns of the last thirty years, and they are already planning a transition to new markets, including increased domestic consumption.
Other things start to squeeze debt driven spending. First, credit cards are increasing interest rates and becoming more picky. In part this is due to new federal regulations, in part they fear bad debts. Second, despite continuing low mortgage rates, the subprime debacle and burst of the real estate bubble has made it more difficult to get a home loan. You now actually have to show that you have the capacity to pay back the loan, something that had been ignored in the heady bubble days. Home equity loans are also down, thanks to the fact home values have declined.
In fact, many people still owe more on their homes than the house is worth. Debt to equity ratios have never been worse, and saving rates are now negative. Saving rates had declined a few years ago to about zero because people put faith in rising home values as a source of future wealth. Now they are down because people need their savings to get by in tough economic times.
Thanks to stimulus funding, the US will probably see an increase in demand and jobs by the summer. This will cause a mini-boom that might last into 2012 or 2013. Since we can’t go back to the debt-driven consumerism of the last decade, structural unemployment will be higher than it used to be, and growth will be threatened when government spending trails off. Moreover, as the public debt nears 100% of GDP, the ability of the state to push the economy forward will falter. It could bring inflation, if the dollar loses value and countries refuse to finance the debt, but there could also be deflation. Japan’s public debt is nearly 200% of GDP, and they are in the grip of a deflationary cycle that has lasted two decades.
Right now deflation looks more likely than inflation. If economic health is defined by looking back at the consumerism era of the last decade, we may be in for a long crisis. In a best case scenario government infrastructure spending initiates a new wave of productivity and exports, thereby allowing economic growth based not on debt, but production. This would not be a return to the heady days of 2006, but could avoid a deflationary spiral or new Great Depression. Depending on how lucrative our exports are, our imports would need to be cut as well to get the current account in balance. If we can’t continue to ‘borrow and spend,’ we at least need to stop spending more on foreign goods than foreigners spend on ours. That would mean a decline in the value of the dollar, but not a major bout of inflation thanks to deflationary pressures at home. Over a decade we could restructure the economy and find a sustainable equilibrium. Gone will be the ‘easy money’ of the bubble economies, but we might set ourselves up for a sustainable prosperity.
To get there, the real thing that has to happen is a culture shift to ‘post-consumerism.’ People have to part with the idea that consumption is the essence of life, save for products they want, not live on credit, and end the addiction to cheap foreign goods. The dream of easy money through stock market gains or real estate investment must end too; investments are risky, during the bubble years they seemed ‘a sure thing.’ I can see this happening; the American people are resilient, and the shallowness of consumerism means that when we’re forced to forgo it, we can recognize it really didn’t bring satisfaction.
Nonetheless, the crisis is real. Without the government instruments to respond to the crisis, we’d be in a Great Depression right now. The crisis is built on the same kind of imbalances which caused past depressions and panics. Government intervention in the economy can’t fix it, it can only try to ease the pain of restructuring. We can’t get back to the wild consumption of the last decade, we can only work to find a sustainable future. That is the challenge. Is America up to it?