An Interesting Post. More Later.

Very interesting post from another blog:

I read a term today, that I was unable to find a meaning for: “End-of-the-Boom Psychology,” and I found the term so provocative, so “media speak,” so “spin doctor,” that I started thinking about the emotional and psychological impact on people who no longer have access to extracting mortgage equity, home equity loans or credit cards. They could have called it the “Depression Mentality” or the ‘Great Spending Contractions,’ because once a family has to start cutting back on their spending, like labor, the economic pressure squeezes will happen closer together and become more painful with each contraction, but without the baby after it’s all over. Less spending will mean major job loss, and more contractions. Inflation means less discretionary spending. No savings means relying more on credit and debt, but what happens when these sources dry up or are maxed out?

First, a few tidbits of information to provide a backdrop to our discussion:

(1) There appears to be an inverse relationship between savings and access to credit/home refinancing. In other words, in those countries where credit cards are introduced, savings rates plummet. “It’s not real money, it’s plastic.” (until the bill comes in). Most expect to pay off their credit cards each month. Most don’t actually do it, and the ones that do pay them off each month are called “dead beats” by the credit card companies.

(2) In trends all over the world, middle class citizens in emerging economies quickly take to the habit of ‘borrowing in order to spend,’ usually with credit cards.

(3) Wealthy and cash-strapped households use home equity differently. Whereas the wealthy tend to use their cash to leverage making other equity-type purchases, such as second homes, cash strapped households pay off personal consumption expenditures (credit cards) (1).

(4) People tend to buy more consumer goods with credit cards and home refinancing, than if they were forced to withdraw from savings for the same purchase.

(5) As about 2/3rds of American households do not save in a typical year, and average over $8,000 in credit card debt, they increasingly rely on credit cards for basic and emergency purposes.

(6) Despite the potential risk of credit default, even relatively poor credit card users are extremely profitable to credit card companies. In fact, they make most of their money in late fees, over-limit, and related costs to the consumer. Most mortgage companies make most of their money in the first seven years of home ownership. Therefore, any money collected on defaulted loans, assuming a stable housing market, is gravy. (2)

(7) Beyond basic necessities, increasing income and consumption does not translate into lifestyle happiness or contentment. Positional wealth (a new BMW or exclusive club membership) is more expensive, but does not translate into feelings of happiness as great as the feelings you got from going from “no car” to “wreck,” and from “wreck” to “first new car.” After that, the pleasure of one new car compared to another is a rather minor jump in “happiness.” The thrill is usually in the anticipation of buying it. (3)

(8) Many people are in denial about the level of credit card debt that they hold, on average underestimating by a factor of two.

(9) Money is one of the top issues couples fight about. The way one spends (or saves) money reflects one’s values. One “shop-a-holic” in the family is enough to cause severe financial strain. Two is much, much worse.

Predictions

I’d like to make a few predictions as those who have become accustomed to using home equity to finance consumer purchases face the difficult reality that that option is no longer available to them and to offer a few suggestions:

(1) “Consuming” isn’t a matter of shopping consciously and deliberately for necessary purchases. It has become a recreation, as well as a “’dream world,’ where fantasy, play, inner desire, escape and emotion loom large.” It will be reduced reluctantly and under great personal strain.

(2) Driving an SUV, remodeling one’s kitchen, dressing in the latest fashions and providing one’s kids with the latest electronic gadgets is a reflection of social status as well as preference. Not “keeping up with the Jones” as cliché as it is, has changed to include the neighbors you’d LIKE to have, (or see on TV) not only those who live around you. While “shabby chic” is “in,” plain shabby isn’t. Therefore, not having access to money may feel like a loss of status or class identity. Upscaling can be defensive to keep one’s social position. Face this squarely.

(3) Shopping habits will be hard to break and credit card debt will continue to mount. Many will be incredulous that their homes have not and will not increase in value in the upcoming year, so will continue to rack up consumer debt as if refinancing remains an option. They will believe other people’s houses go down in value, but not their own.

(4) Regardless of their current income, homeowners who begin to believe that their access to ATM home equity has actually stopped will suddenly notice how much more money they owe on their homes and feel dramatically poorer. It will be a shock to learn that even cutting away the “extravagant” spending will not bring their budgets into line. The distinction between “luxury” and “comfort” will be blurry and they will be shocked when forced to realize that “simple pleasures” like vacations or cell phones are “luxuries.” This sense will be pervasive and depressing to them. They will feel “out of it” in being unable to buy the latest “in thing.”

(5) Most will see their situation as “personal” and “blame-worthy,” and not as a participation in a commercial /cultural phenomenon. Keeping one’s credit card purchases “under control” is seen strictly as an issue of self-discipline and maturity, and social and industry pressures will be ignored or discounted. “Outrage”at changing financial conditions in the country will be kept to a minimum by those most in debt. Debt has become the new ‘opiate of the people.’

(6) The sense of loss will be felt most acutely around the children: no longer being able to “afford” better neighborhood schools or private schools, computers, lessons, cable TV and high-speed internet, and extra-curricular activities. They may face teen anger at no longer enjoying the “necessities” of life like cell phones. They may face guilt and feel like bad parents.

(7) As the dollar continues to be devalued, the cost of two adults working in the labor market will continue to increase in terms of a second car, child-care costs, cell phones, career wardrobe and time-saving expenses. “Pressure-relieving release valves” will also get more expensive, and will be the first to go. As financial necessity requires them to stop take-out food purchases, dry cleaning, health/stress-relieving experiences such as massage and gym membership, stress and anxiety will increase. Illness, relationship problems, domestic violence, drug and alcohol use, stress-related disorders, depression, and a whole host of other psychological difficulties will increase.

(8) Some estimates predict that between 25-50% of households live paycheck to paycheck in the US. Unanticipated but common expenses such as car repair, home repairs, health care emergencies etc. will sink these families deeper into credit card debt, which will eventually boost their interest rates. This will continue a downward financial spiral.

(9) “New” methods of getting into debt will continue to be offered including loans on retirement monies and life insurance policies. All will be designed to extract from you the very air you breathe and leave you worse off. Those that pursue these options will eventually not be able to ‘dig themselves deeper into debt’ because TPTB will take away the shovel. But at that point, they will still be in a hole, and be very very deep. This will happen on a community-wide level as well as a personal level. Communities, in a desperate search for new sources of funding, will sell off water rights, utility rights, etc and will also end up worse off financially.

(10) In the last twenty years, private ownership has replaced public consumption: private swimming pools have replaced community pools, cell phones have replaced public pay phones, cars have replaced public transportation. We have expanded private libraries while under-funding public ones. As families can no longer afford these private costs, there will no longer be public options in place to substitute. As tax dollars shrink, those services that are provided will be reduced or eliminated. If the “catch up” happens at all, it will be a long, slow transition back to a more collective world.

(11) Business-dominated government will continue to advocate solutions that will promote private consumption and production. Just as they discouraged public laundries in favor of selling individual washing machines a hundred years ago, they will continue to promote regulations and restrictions that make common–wealth solutions difficult at best.

(12) The ways in which families “contract” financially will have a tremendous impact on their communities. Where they continue to shop, repair, recreate, worship and donate to, will be the shops, laborers, and institutions that remain available to them as times get tougher and increasingly local.

(13) “Joy rides” will continue to be a form of recreation, despite their increasing costs. When in motion, people feel lighter and more carefree. They will sacrifice quite a bit before eliminating an “unnecessary” drive for ice cream, leaf-peeping, etc.

(14) Learning to live in a “cash economy” is a learned skill, as is learning to live within one’s means.

(15) Hanging around a chocolate shop might be a bad idea for dieters. Watching TV ads, high-gloss consumer magazines and mall visits might be a bad idea for those pulling in their spending.

(16) In facing difficult financial times, those who focus on values that stress family, religion, community, social commitment, equity and personal meaning will have an easier time than those scrambling for the remnants of a prior consumptive-based lifestyle.

(17) Some families will begin the contractions by establishing a waiting period for purchases. During these “waiting periods,” the person often finds that the “urge to buy something” often fades. Some will discuss purchase goals with family or trusted friends, and brainstorm other options. “Saving up” for big purchases may also happen more often.

(18) Misery will increase if those in debt don’t figure out how to have fun cheaply. Developing a list of free or low cost leisure activities one can do by yourself, with a special other, and with a group is one coping strategy. Leisure often takes a distant second in an income-generating/spending view of life. If families keep fun and leisure on the list when cash is tight, they will release some of the enormous pressure that will build up.

(19) While divorce will seem like a welcome break from the “stress” of being married, it will make financial issues much, much worse. Many will reconsider and reflect on marital vows that included words “for better or for worse; for richer or for poorer,” that will have once seemed quaint and irrelevant to modern times. Verbal and physical violence will have the potential to escalate when financial problems are seen as “personal.”

(20) The true secret to wealth is to spend less than you earn. Those who will weather the storm best will being now making sure that monthly expenses don’t exceed their income, take active steps now to reduce those expenses, and try and live on one salary. “Voluntary Simplicity”will be more than a slogan for the lucky ones, and the pay off will be first debt reduction or downscaling, and then debt elimination.

We can’t use the previous ‘Great Depression’ as a good guide to how people will react, because there are too many differences between that previous generation and our own. We have very few farmers, and many homesteading skills have been lost. Most of us, now, are city dwellers across the globe, and have become reliant on the culture for our most basic needs. We not only don’t make anything anymore, few of us can do anything anymore that doesn’t require fossil fuel, and most have very little interest in learning. During the Great Spending Contractions, those who have few skills and don’t know the difference between an asset and a liability (hint: your house is a liability because it takes money OUT of your pocket) will be shocked to learn the difference if they are forced to cash out. They will be surprised just how much they can live without, and will feel better about it if it is their choice, and not forced upon them.

References:

(1) Greenspan, A, & Kennedy, J. (2007). Sources and Uses of Equity Extracted from Homes. Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C. (pdf found online) www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf

(2) “Maxed Out” www.maxedoutmovie.com/about/index.html

(3) Wachtel, P. (1983 ). The Poverty of Affluence. New York: Free Press.