Consumer Paradigm in Flux: Spending Must Be Cut Back Across the Board

Building the Green Economy, Quipu Economic Forum, Water Scarcity :: Comments (0)

12 May 2009 :: by J.E. Robertson

The US economy has faced serious challenges on a number of fronts, over the last few years, contributing to a complex downturn with little easy salvation in sight. In order to transition to this new era of recovery and slower growth, the US consumer will have to cut back drastically on luxury spending, and the market will have to rely less on the easy flow of consumer credit.

Part of what has left so many analysts confounded by the current recession is a series of government actions and “bubbles” in the private sector that have masked the long-term weaknesses that were converging to bring this crisis about. Since 2001, we have had a consistent pattern of government inflation of economic statistics, with rosier outlooks presented, only to be recast in a more negative light, weeks later in low-visibility “updates”.

Changes to consumer bankruptcy laws made it harder for individuals to access the bankruptcy process, which —as we are seeing with Chrysler at the moment— is intended to help clean up unsustainable debt and restore economic viability. This lack of access to bankruptcy led borrowers in trouble to either seek more credit, which would only raise their repayment burden, or go longer and longer stretches into delinquency, bringing down debt relationships (i.e. creditors’ books) along with them.

The result has been mass foreclosure, mass credit-card default, higher unemployment, and the ripple effect of less access to healthcare, escalating costs for those paying and a basic rift between the consumer and the consumer markets in terms of provision of healthcare insurance, financial products, industrial goods, energy production and basic foodstuffs.

The consumerist-oriented culture has proven to be something other than a consumer-oriented culture. That market dynamic, in which the continual expansion of consumption as primary economic driver came to dominate calculations about product, service and regulation, did not enable the creation of market dynamics friendly to the interests of actual consumers.

It is this dynamic which is now under historic pressures, and which will, inevitably, at least to some degree, change. While “saving a little for a rainy day” has always been considered wise and level-headed, the recent economic boom cycle saw the active championing of over-spending. Not only businesses and banks, but even the government, got involved in pushing for the unsustainable expansion of consumer over-extension.

Cutting back on spending, tightening the belt, is something consumers have begun doing, starting in 2007, not necessarily due to caution or preference, but to necessity. Now, as massive amounts of economic stimulus have been needed to prevent the banking freeze from driving the long-term outlook into a prolonged tailspin and the certain disaster of depression economics, spending-within-reason and pay-as-you-go are becoming valued new paradigms for economic activity.

The market as a whole, however, needs to adjust, and it will take time. Financial services and product offerings, interest rates and the pitfall particulars of fine print, insurance business models and property ownership, must all be re-situated within this new economic matrix, in which infinitely expanding consumption cannot be taken for granted.

From summer of 2008 through spring 2009, we have seen an astonishing reluctance on the part of major financial institutions to adjust to the new reality. They are, for lack of a better description, clinging to the idea of fixed profits that depended on inflated —and likely irrecoverable— property and stock valuations. Debt holdings are still continuing to approach default at historic levels.

That reluctance is understandable, because it is what individuals do: make major psychological adjustments slowly and grudgingly, clinging to hope that a preferred circumstance will return. In some cases, such behavior is justified; in others, it is not. In major financial institutions facing the Great Recession, it is a short-sighted behavior, motivated by the fear-reflex, which has real-world negative impact on a potentially massive scale.

This is why we are seeing a renewed passion for serious regulation of the financial sector, not just from and impassioned and populist Main Street, but from government and from within the financial sector itself. The law of no law became too vast and too risky to keep track of. Too many variables came into play. Too many manipulations. And now, there is an urge to find something more credible, more stable, more sustainable, which can return to hold a prominent place in overall economic output.

Pres. Obama announced in his inaugural address that he saw this as a new “era of responsibility”, and by this he meant not only individuals, but also major institutions: that responsibility is not only owning up to your failures but also acting with responsible long-term vision, for the benefit of future generations and the sustainability of a vibrant capitalist democracy under the US Constitution.

He also has said he does not wish to see the financial sector return to accounting for 40% of all American corporate profits, though it should return to its rightful place among major factors in overall economic prosperity. The overdependence on profits from the financial sector implicitly suggests that the huge amounts of financial activity are actually backing less of the rest of the economy’s activity across the board, meaning the financial activity itself is getting to be overextended, riskier and unsustainable.

Economists are saying a lot about the risks of inflation or the risks of deflation, either that costs will spiral upward or revenues will spiral downward, in either case creating an untenable level of over-stress on the flow of capital, undermining businesses, forcing the cutting of personnel and prolonging or deepening the general economic malaise. But: prices, and valuations, have to come down; this whole recession is to a large extent a natural correction of market dynamics, stemming from abusive and irrational ideas of infinite expansion of total wealth.

So, the public, the government, and the private sector, need to plan for price adjustments and the scaling back of the major costs for the average person to sustain life, both biologically and socio-economically. The costs of staple nutrients, of basic healthcare, of clothing, shelter and education, must be brought within reason, without a free society having to relinquish the laudable and necessary goal of broad-based middle-class prosperity.

Less reliance on automatic profit formulations, 30-fold manufacturing mark-ups, extortionate medical expenses, and the commodification of water, clean air and basic nutrients, is fundamental to long-term sustainable economic recovery. That basic paradigm reformulation —spending less, or having to spend less, is an economic plus, perhaps even an ‘asset’— must begin to take root, if we are to optimize the time-frame of our return to reliable broad-based prosperity.