Tuesday, October 9, 2007

Economists fear consumers may start spending within their means

Here's a depressing AP article about consumer borrowing habits. The Christmas shopping season is already upon us, with retailers begging you to come in and spend money you don't have. Home equity loans are dried up, leaving credit cards as the most accessible way to borrow your way into oblivion. As a result, revolving credit debt is up-up-up! That's not really what depresses me. What upsets me is that the "experts" out there, the economists, whoever they are, are completely happy with the outcome.

Now that Americans have sucked all the equity out of their home, they're diving right into higher-interest debt, with the credit card industry. It's kind of like jumping out of a pool with a couple sharks and into a pool with a dozen piranhas.

During the housing boom, when home sales were hitting records for five consecutive years and prices were soaring, many homeowners tapped the rising value of their homes to finance increased spending by taking out home equity lines of credit.

However, now that home sales are plunging and double-digit increases in housing costs are a thing of the past, home equity lines of credit have become less available. That has pushed consumers back to credit cards to finance their spending.
Hey, heaven forbid people start spending within their means. Let's increase spending even though we aren't increasing income. Let's fuel big companies by borrowing more money. Here's a question, brilliant economists: What are we supposed to do after the home equity has dried up and the credit cards are maxed out? How exactly will we still be fueling economy when we're all freaking broke and three-quarters of our paychecks are getting sucked up by interest charges?
Analysts are watching closely to see if the steepest slump in housing in 16 years could have a more serious impact on the economy through the wealth effect
I had no idea what the wealth effect was so I looked it up.

One problem, home values don't make you more or less wealthy unless you plan on selling the house and living on the street. Instead we get this "perception" of wealth by letting people take out loans.
the fear is that falling home values could cause consumers to cut back on their purchases. Since consumer spending accounts for two-thirds of total economic activity, any serious cutback in spending could lead to much slower economic growth.
GOOD! Fear? Are these experts idiots? How does it help our economy if we're all broke! People need to start paying off their debts and living within their means. Then when they have real capital they can go spend it.

FRB G.19 Release


Mike, Nicki, and Josh said...

But if people stop spending, the economy will fall into a recession. At this point, America's boomers are ready to retire and if the nation is in a recession then it will impact the boomers' ability to live life to the fullest in retirement. The Feds have to keep lowering rates so people will keep investing and helping those retirement accounts grow... to heck with the value of the dollar and any remote sense of economic security for future generations. We must only think about the here and now.

Beyond the Consumer said...

I hope that was sarcastic!

Jim said...

I think the focus of the economy is always on how things are going at any given moment. Some of the boomers who thought social security is going to fund their retirement are going to find their world shaken from living beyond their means. I feel that Gen X is a working generation, but the Gen Y (or better yet, Gen WHY?) have a sense of entitlement right out of the gate.

A lot of holidays, like Christmas, people think they have to go out and blow a ton of money to make everyone feel happy. Then the news reports in January let everyone know how well they did as they open the credit card statements. When I was a kid I always had something I wanted. Now that I am older, I don't want as much. By spending less I find that I have more money, and that is a good feeling in my book.

Nivek said...

I've got the feeling we'll be paying for the Boomers long after their all dead and in more ways than one.

I guess the only patriotic thing for me to do is break out my credit cards and get to spending. Can't have the American way of life threatened by my unwillingness to be indentured to CitiBank!

Mike, Nicki, and Josh said...

Yup, my previous comment was pure sarcasm. I'm part of that Gen X that Jim refers to as the "working generation" (I can't agree more). I'm also sick and tired of reading stories about how the baby boomers are concerned that even though they've saved $2M for retirement, they're concerned that they won't be able to have the same standard of living when they stop working due to inflation. As far as I'm concerned, they were living above their means during their working years, so what's going to stop them from continuing the debt cycle if it keeps them living the lush life? Ultimately, it's the Xers and Yers that'll suffer... and I do worry about the Yers because they do seem to have similar entitlement characteristics as their boomer parents.

Thanks for allowing me to rant in this small space.

Mrs. Micah said...

It's hard to be told that your lifestyle would bankrupt the country. (and people sometimes tell me this.) Sometimes I feel like a bad person for not supporting more jobs. But I don't feel bad for not spending more money because I can't afford it.

Good post. Unfortunate subject. :-/