Earn What You Spend

We’ve been talking about consumer spending quite frequently.  And with good reason - it’s a crucial part of the cycle we’re currently in.  Or, as Paul Krugman stated, we face a widening gyre with “feedback loops causing the financial crisis to spin ever further out of control.”  

The WSJ takes a demographic look at the crisis, and notes that what “Baby Boomers of all persuasions have done, without dispute and to an unprecedented degree, is spend money instead of saving it.”  

We have a generation that has become quite accustomed to financing their future with debt. Take a look: 

Source: WSJ

There are a number of interesting things to note here.  First, look at the decline in the household savings rate - I’ve shown this same graph a dozen ways, but it is worth looking at again.  That is quite a steep decline.  Additionally, we’ve more than doubled (even adjusted for inflation) the average liability per household.  Sure, some of this may be convenience charges, but that in no way explains such a drastic increase. 

And now the generation that has not earned what they’ve spent is headed for retirement.  That, too, has some dire consequences: 

As Boomers send their kids out into the world, they are entering the phase of life when income starts to fall, spending slows and houses get sold. The same generational heft that Boomers used to create fads for hula hoops, sport-utility vehicles and Harleys will now work against them as all of them rush to cash out and slow down at once. That puts more houses up for sale to far fewer buyers: a younger generation that is also less able to afford them.

And we’re back to the same feedback loop we’ve spoken of before:

We’re in the middle of an unprecedented credit crisis and a faltering stock market.  This leads debt-burdened individuals to pull back in spending.  In turn, that causes a reduction in the GDP and causes the stock market to fall further, bringing us back full circle.

Only this time, it is the combination of the overleveraged consumer with retirement.  Already, consumer spending has dropped for the first time in 17 years. A forced pullback in consumer spending because of the loss of wealth–in equities, bonds, and real estate–is certainly bad enough.  I guess the only comfort here is that fewer baby boomers are going to be retiring anytime soon.