Thursday, August 19, 2010

Americans Discover Thrift and Start to Change Their Culture

America is currently undergoing a cultural sea change. Old habits die hard, but die they do, and one of those that is expiring before our eyes involves profligate spending, borrowing to spend more, and consuming as if there were no tomorrow.

Now, tomorrow has arrived, and that the bills have come due. And this requires, from the top to the bottom of America, from the postman to the national government, a different attitude toward money, different social values, and different behaviors.

We are not evolving; we are not growing; we are not fulfilling our potential; we are not expanding our quota of insight. Not at all. We are being forced, by the weight of reality, to change our ways. 

To weigh the mess we have spent ourselves into, take a look at David Rosenberg's e-letter a couple of days ago. Link here.

By his numbers, the ratio of household debt to income peaked at 136% in early 2008. That means that the average household owed around a third more than it earned. Today that ratio has declined to 126%, suggesting that we have made some progress reducing household debt.

Unfortunately, if we were to return to the halcyon days before the credit bubble, household debt would have to return to 70% of household income. Before that could happen, we would have to pay down $6 trillion worth of debt.

Or else, take the ratio of debt to household assets. Currently it sits at 20%. The high was 22.7% in early 2009. The norm is around 12.5%. To return to a sustainable norm we would have to pay down $7 trillion of household debt.

Clearly, it has to be done. Clearly, we do not have much choice in the matter. But just as clearly, as Rosenberg explains, the more we use our money to pay down debt, the less we use it to purchase things. The less we purchase the more stores will have to lower prices to attract buyers. Lower prices either mean lower costs or lower profits. Lower costs usually mean fewer employees. If they mean less profit, they will also mean a lower stock price, and likely lower housing prices. These in their turn will entail lower household assets.

In a deflationary spiral DEBT is the ultimate four-letter word.

Rosenberg explains it better than I do, but the situation will likely produce a deflationary spiral, and this is very bad news. By his estimation, we can still work our way out of the hole we have dug ourselves. It's going to take between five and seven years, and it is going to be painful.

We will do it quicker, perhaps suffering more short term acute pain, if we are more thrifty. Surely it would help if governments, federal, state, and city were to make a virtue of thrift. For now, it appears that the message has reached local and state governments, but not the supposedly brilliant mind that inhabits the White House.

I offer some of the numbers because numbers are a reality. And their reality is currently in the process of forcing people to learn to value thrift.

Thrift is a classical virtue. It is a sign of good character. The credit bubble, with its attitude of spend more, whether you had it or not, undermined the virtue of thrift.

Nowadays people are more interested in paying down debt and increasing their savings. They are less interested in spending more and consuming conspicuously. Thus, thrift is back with us.

But thrift is not just about money. It is about how you express your emotions, how you choose to conduct your life, and even about how you spend your sexual energies and impulses.

Take these values of thrift, self-control, and self-restraint. Weren't they considered to be the enemy of those who wanted to live in a culture that valued self-expression, self-actualization, and fulfilling all of your potential?

People who are seeking instant, or even delayed, gratification are not very interested in thrift. They are happier, or better, they feel more like they are part of the countercultural revolution, when they make a vulgar display of consumption.

And what will happen when the habit of thrift becomes so ingrained that people begin to practice sexual self-restraint. What will happen if they discover that they have been profligate with their sexual capital, and need to take some time to rebuild their erotic balance sheet?

I don't want to leave you on such a bleak note. So I would close with the thought that if you can have it all, and without working for it, then you have compromised your freedom.

Freedom involves choice, but that means that it also involves sacrifice and compromise. You cannot take all roads at once. And once you have chosen one, others will forever be closed off to you.

You cannot be free if you are trying to have it all. You cannot be free if you believe that you can fulfill all of your potential. 

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