(NOTE: This is an excerpt from Chris Temple's provocative Special Report entitled "Understanding The Game". For more information or to order this latest report-part of Temple's Bear Market Survival Package-visit www.nationalinvestor.com)
With the benefit of the foundational information on how our fractional reserve system works in the preceding pages, let's spend a few minutes addressing "consumerism."
Many of you, as I, have had occasion to visit with older relatives in particular who talk about how things were back in "their day." Life was much simpler in many respects. One of the evidences of this is just how much debt was not only sparingly used, but was once actually scorned by our parents and grandparents.
Apart from a home mortgage, members of generations past worked and saved their money. From their earnings, they bought a washer-dryer. A television set. A new car. If their particular middle-class job paid especially well, maybe even a few luxuries - a boat, a summer cottage, a vacation - could be afforded. In every instance, though, virtually all of these items, needs and wants alike, were purchased after folks had first worked for and earned their money.
Today, the average American does things in reverse. Armed with offers too tempting to pass up for a fist full of credit cards, a line of credit drawing on their home equity and similar mechanisms, today's American consumer spends money at a far greater rate than past generations. Short of working for the money first, however, most today go into debt to buy the latest gizmos, gadgets and such (more of which fall into the "want" category than "need.") They do so not only because the credit is so easily obtainable, but because they have the underlying optimism that the great American economy will never let them down.
Our parents and grandparents look at this kind of behavior in horror. Among other things, they feel that today's generation has become too materialistic, if not downright decadent. To be sure, there's a lot of truth to this.
However, what one and all miss as the discussion of today's consumerism usually revolves around "values" is a deeper - and, in fact, much simpler - dynamic. In short, now that you understand The Game of fractional reserve banking, you should be able to recognize that the behavior of consumers today is more a question of simple mathematics.
Simply put, the fractional reserve system would collapse if new debt weren't continually being taken on. Copious and ever-growing amounts of debt need to be created in order that consumers, businesses and government can 1) service existing debt, and 2) buy more stuff, much of which they don't need. By this means, the system, which can only exist on credit creation and rising debt loads, continues.
Well beyond a sign of how our values as a nation have changed when it comes to money, debt and materialism, today's consumer behaves as he (or she) does because it has become an everyday, accepted part of life. Further, such behavior is both taught and encouraged by the system: the banks, corporations, their Madison Avenue advertising agencies and all the rest. Yes, technological advances and the economy's remaining creative impulses have brought us more and better products and services with which we can live a better life; and I do not disparage any of that. But the system's need to push us all farther into debt by borrowing and consuming so much is what is chiefly at work here.
On that score, we've seen a proliferation in recent years of ways in which Americans can more easily go into hock. It used to be that, for a mortgage, one needed to accumulate, say, 20% in cash of the purchase price of a home. Armed with this, the average person could walk into the local bank and borrow the other 80%. The bank figured that since it was not risking the entire amount (and assuming the applicant had a sufficient income to make the mortgage payment) the risk was one worth taking for the return (interest.)
Today, it's common for someone to be able to buy a home with no money down. Further - if your credit and payment history is sufficiently strong - you can even borrow more than the value of the home itself! For years now many banks have made "125% mortgages" or home equity loans available. If your home is worth $200,000, for instance, the bank will loan you $250,000.
To keep the fractional reserve system humming along we also have the means today to take out mortgages where no principal payments are required, at least initially. By these devices, many more homes can be sold to new buyers who would not be able to afford them via a conventional note where payments including interest and principal would have them in over their heads. The same effect occurs with adjustable-rate mortgages, where homes become "more affordable" that otherwise are not, because the bank charges a lower rate of interest tied to what market rates are. Everything here is hunky-dory to some extent provided, of course, that interest rates don't rise significantly and lead to payments becoming unmanageable.
Not only does the banking industry have to "force" greater levels of marginally serviceable debt onto the public to keep The Game (and the housing bubble) in tact, but it has now graduated to prodding consumption elsewhere in similar ways.
Faced with a plunge in new car sales following 9-11 and the subsequent recession, Detroit was desperate to goose sales. In the intervening time, we've seen all manner of incentives designed to get Joe Sixpack to buy a new car, truck or S.U.V. Given the "no interest til Jesus comes," big cash rebates and the rest, Joe has happily obliged; and until recently, car sales were going through the roof. More cars have been moving, more debt is being incurred, and the gimmicks to keep up a decent level of sales (that has sure changed for the worse in the last few months, though) have gone on.
Even department and furniture stores&computer makers&and others are getting into the act. In almost every Sunday paper now, you'll find the majority of merchants pitching "no payments til 2005" or even (I kid you not!) 2006 in a couple I've seen recently.
Far from being benevolent, all these merchants - whether they are selling homes, cars, computers or shoes - are simply doing what they have to do to keep the fractional reserve system going a while longer. In the end, though (unless you believe that the housing bubble is going to keep growing indefinitely AND that stocks are going to commence a new multi-year bull market) the U.S. consumption-driven economy is doomed. This is for two reasons that should be obvious.
First, the consumer is finally getting worn out. I have likened the current plight to the following analogy: Let's say that you and I go out to the nicest restaurant in town, and really put on the dog. We get the nicest entrees, have the before and after dinner drinks, dessert and all the trimmings.
About the time we think we're going to explode, the waiter comes with the check. About the time I'm trying to move my body enough to take it from him he pulls it back and says, "We're sure happy that you enjoyed the meal so much. The total bill comes to $100.00. But before you pay it and leave, the chef asked me to tell you that he still has a lot of food left in the kitchen that he doesn't want to throw away.
"So, if you'll stay here and order dinner again before you leave, we'll only add another $10.00 to your ticket. May I start you off with a cocktail...?"
I don't know about you, but I can't eat another thing. I don't care if they give us another meal. Consumers are in the same boat; they have all bought new homes, refinanced it a time or two, bought three new cars, the latest upgrade for their computer and more - most of it on credit. As the automakers are now starting to discover, all the price cuts and incentives in the world don't change the fact that consumers are pretty well stuffed.
And, there's a second problem here which, in the grand scheme of things, worries me even more where the long-term outlook is concerned for America's consumers and, therefore, our economy and financial markets. That problem is the recent stagnation in wage growth and the prospects for more of the same (or worse) in the future. It's bad enough that Americans have gone from working and saving before making expenditures to the present situation where most borrow first and pay later. To the extent that the ability to ultimately pay off all this crap is based on future earning ability, the picture is dire. Thanks to the fact that America's leaders - both in public office and in corporate boardrooms - have long since embraced the ultimately destructive regimen of so-called free trade, middle class jobs in America, with their attendant middle class incomes, have been vanishing. More and more today, your fellow citizens are losing a $60,000 per year job and having to take two new ones paying a total of far less.
When you remember that consumer spending accounts for roughly two-thirds of overall economic activity in America - and when you realize that consumers' ability to take on endless amounts of new debt has peaked - you can come to no other conclusion than that we face a road ahead of us that (if we're lucky) will be similar to what Japan has endured for nearly 15 years.
