A column here two weeks ago placed the financial crisis within a historical context. The financial meltdown is part of the disruptive transition from the Information Age to the Shift Age. We are moving through a period of turmoil when the old order is being replaced by a new order. The nation state economic model is being replaced by a new global model. We are at a time when the old ways no longer seem to work and yet the new realignments are not yet clear.
In the United States there have been three great waves that have arced over our society during the last 30 years. The incredible run up in residential real estate values since the late 1970s was the first arc. Except for a short period in the early 1980s and then again in the 1990s, the value of residential real estate seemed to go ever upward. This of course created a great sense of wealth for those that benefited. In the early part of this decade millions of households took advantage of historically low interest rates to take out billions of dollars of equity to use for purchases. This 30 year cycle obviously came to a crashing halt two years ago.
The second arc was the historic bull market in stocks that started in 1982 and, with a correction in 1987 and again in 2000, continued to its historic high in 2007. This arc also created a great sense of wealth for millions of American consumers. Investing became easy as the market seemed to go ever upward. This led consumers to feel rich and to feel entitled to ever more material goods and even extravagance. September and October 2008 put an end to that.
The collapse of the housing arc has had a stunning effect on the debt marketplace, which led to the collapse of global equity markets in the past few weeks. The suddenness and historic speed of the collapse of equity markets around the world was felt viscerally by billions of people around the world. In the United States there has been an evaporation of $2 trillion dollars of net worth in a matter of months.
The collapse of these two arcs is now going to bring about the collapse of the third arc that has defined the U.S. economy for the past 30 years. That arc is consumer spending. Consumer spending makes up two thirds of the GNP of the country. The past three decades has been a time of unparalleled consumption in the U.S. The size of houses grew, the number of cars per household grew. There was an explosion of electronic goodies that filled every room, pocket and briefcase. Extravagance increased in household purchases, dining out and travel. This arc has fueled the American economy since the recession of the early 1980s. That arc is now going to lose its trajectory and a fundamental shift is about to occur.
Why do I say this?
The recent stock market collapse has left most people feeling suddenly poorer. This crosses all generations. Those that are retired now fear that the golden retirement will be a silver or bronze one at best and there is nothing to be done but to spend less. The largest generation, the Baby Boom generation, now feels as though they may never be able to retire. The greatest amount of personal wealth in America is controlled by those 50 and older and these people all feel suddenly poor and no longer have the secure faith in their financial future that the ever rising value of housing and stock provided. The reaction is to stop buying stuff. When the largest and most affluent part of the population decides that becoming thrifty is the one thing they can do in a world they no longer feel they can control it is going to have a profound effect on consumer spending.
To compound matters, the X and Y generations now see that if the baby boomers postpone retirement indefinitely, they may not move up the promotion ladder as fast as they had thought. This means they realize they can no longer spend on the assumption of increasing family incomes.
The Millennials that are now entering the workplace see this mess and realize that they can not trust the social institutions that the older generations did. They feel that they are being handed a bad deal, that the economy is not the booming one their parents showed them. This means they realize that they will need to be self sufficient economically, which is why a higher number of college graduates than ever before are desiring to be entrepreneurs so they can at least attempt to control their own destiny. Lavish spending is not in this picture.
So, from retirees to those just entering the work place, consumers all, will consume less – dramatically less. A new social trend will begin. Thrift will replace extravagance. As small is the new big, thrift will be the new behavior, the smart and cool thing to do. In the next column we will take a look at how that might look and what might happen in the next 24 months.