Spending What You Make
Spending only what you make shouldn’t be a foreign concept. It’ll become a whole lot more familiar in our current economic climate.
Henry Blodget at Clusterstock explains why consumers are a critical component of this recession. [via Feelix]
Because the US consumer is finally broke. For thirty years, we piled on debt and then spent almost every new penny we got. This borrowing spree was made possible by a smorgasbord of no-money-down lending products and ever-appreciating asset prices. Unfortunately, the situation has now changed. The lenders who created those products have now been demolished, and asset prices are falling fast. And this is leaving American consumers with no choice but to cut back.
Blodget goes on to analyze this statement through a particular lens: Home Equity Withdraws, or using artificially increasing home values to finance your spending. This, of course, only works so long as home values are increasing.
One point in particular caught my eye:
As consumer net worth shrinks, other sources of financing–credit cards, home equity loans, car loans, student loans, etc.–will follow a similar path, and consumers will increasingly be limited to spending what they make. (emphasis added)
Like I’ve mentioned in the past, there are plenty of valid uses of debt; home mortgages have historically been one of them. But being limited to spending what we make shouldn’t happen only after an economic meltdown. This is should be the norm, not a deviation from the status quo. One of the downsides of the easy access to consumer credit is that we fail to approach debt with the necessary caution.
