During the so-called Gilded Age in the United States in the later part of the 19th century, a writer recounted that there were parties at which guests wrapped cigarettes in the money and cigars were lit with burning dollar bills, for the fun of “inhaling” money.
That age had other, equally absurd things going on, part of a colourful social history. We again seem to be confronted by something somewhat similar – reckless consumers. We need to understand the economic consequences of that kind of behaviour.
Our economy nowadays is beset by a new generation of posturing consumers, sort of the economic “walking dead.” Encouraged by the governments of Canada and the United States, lax credit standards have been extended to a broad cross-section of the public, postponing a day of reckoning and, of course, inevitable failure.
Innovation and enterprise have declined as people have engaged in a bubble-like rush to buy something or to go shopping, regardless of need. Credit card usage and bank lending allowed that irresponsible nonsense to continue for a long time.
After a record buying binge that lasted for more than a decade, our consumers are stretched as never before. Consumption excesses were built on a precarious foundation of easily available credit at low interest rates, further fuelled by rising house prices, which led many to believe that they were getting rich painlessly.
It will take a long time for our consumers to recover from the ravages of that gigantic spending binge. In Canada the ratio of consumer’s debt to income has climbed to historic heights, even exceeding what has transpired south of the border.
What has been essential for a long time is de-leveraging, the paying down of excess debt. Household sector debt has stopped climbing and has just started to reverse. Even now, it is far above the average of the 1975-2000 periods.
A similar pattern is becoming apparent on the saving side. The savings rate has fallen to about zero. Too many people took comfort from the fact that the values of their homes were climbing, in some cases to astronomic levels, so the public seemed to say, “Why worry?”
Our government, like that in the United States, aimed to get the foolish consumers to ignore that such behaviour is clearly unsustainable and to start spending again, regardless of their wrenching balance sheet damage, which eviscerated so many in the previous decade.
Will consumers be smarter this time? Households know and feel that the business recovery has not been a real one, and that there are no easy handouts to be forthcoming. The volatile and confusing stock market provides little long-term support. Automobile sales remain buoyant, but nagging fears about the economic outlook will put a damper on that.
The wealth effect of the weak economy and falling house prices will mean subdued consumption for an extended period. A return to an era of reckless consumerism simply is not in the cards.