Re: Newsweek: The Great Shopping Spree, R.I.P.

On Sun, 20 Apr 2008 11:38:32 -0700 (PDT), California Poppy
<GoldenStatePoppy@xxxxxxx> wrote:

On Apr 20, 1:20 pm, Florida <demeter547op...@xxxxxxxxx> wrote:
The Great Shopping Spree, R.I.P.
      For two decades, it's been driven by rising debt levels.
      At the end of 2007, household borrowing was a dizzying $14
trillion.
Robert J. Samuelson
NEWSWEEK   Updated: 11:40 AM ET Apr 19, 2008

Transfixed by turmoil in the financial markets, we may be missing the
year's biggest economic story: the end of the Great American Shopping
Spree. For the past quarter century, Americans have gone on an
unprecedented consumption binge?for cars, TVs, longer vacations and
just about anything. The consequences have been profound for both the
United States and the rest of the world, and the passage to something
different and unknown may not be an improvement.

It was the ever-expanding stream of consumer spending that pulled the
U.S. economy forward and, to a lesser extent, did the same for the
global economy (the reason: imports satisfied much of Americans'
frenzied buying). How big was the consumption shove? Consider. In
1980, Americans spent 63 percent of national income (gross domestic
product) on consumer goods and services. For the past five years,
consumer spending equaled 70 percent of GDP. At today's income levels,
the difference amounts to an extra $1 trillion annually of higher
spending.

To say that the shopping spree is over does not mean that every mall
in America will close. It does mean that consumers will no longer
serve as the reliable engine for the rest of the economy.
Consumption's expansion required Americans to save less, borrow more
and spend more; that cycle now seems finished. Americans' spending
will grow only as fast as income?not faster as before?and maybe a good
bit slower. The implication: without another source of growth (higher
investment, exports?), the economy will slow.

Just why Americans went on such a tear is a much-studied subject. In a
new book, "Going Broke," psychologist Stuart Vyse of Connecticut
College argues that there has been a collective loss of self-control,
abetted by new technologies and business practices that make it easier
to indulge our impulses. Virtually ubiquitous credit cards (1.4
billion at last count) separate the pleasure of buying from the pain
of paying. Toll-free catalog buying, cable shopping channels and
Internet purchases don't even require a trip to the store. Pervasive
"discounting" creates the impression of perpetual bargains.

There's something to this. In 1976, L.L. Bean began accepting credit
cards over its toll-free lines; in a few years, sales soared. But the
recent consumption binge probably has more immediate causes. One was
the "wealth effect." Declining inflation in the early 1980s (in 1979,
prices rose 13 percent) led to lower interest rates?and they led to
higher stock prices and, later, higher home values. More Americans got
into stocks; the number of customer accounts at brokers went from 9.7
million in 1980 to 97.6 million in 2000. People regarded their
newfound wealth as a substitute for annual savings, so they spent more
of their annual income or borrowed more, especially against higher
home values.

The "life cycle" (a.k.a. demographics) also promoted the shopping
extravaganza. People borrow and spend more in their 30s and 40s, as
they buy homes and raise children. In the 1980s and 1990s, many baby
boomers were passing through their peak spending years. That
reinforced the wealth effect. Finally, the "democratization of credit"
supported the shopping spree. At the end of World War II, it was hard
for most Americans to borrow. Since then, mortgages, auto loans and
personal credit have been liberalized. There's been a steady expansion
of credit to new groups. By 2004, three quarters of U.S. households
had debt.

What's notable is that all these forces for more debt and spending are
now reversing. The stock and real-estate "bubbles" have burst. Feeling
poorer, people may save more from their annual incomes; it's already
much harder to borrow against higher home values. Demographics tell
the same story. "Life-cycle spending drops among 55- to 64-year-olds"?
they borrow less and their incomes decline?"and that's where our
household growth is now," says Susan Sterne of Economic Analysis
Associates. "After 2010, growth is among the 65- to 74-year-old
households, where incomes are even lower."

And credit "democratization"? Well, the message of the subprime-
mortgage debacle is that it went too far. Up to a point, the spread of
credit was a boon. Homeownership increased; people had more
flexibility in planning major purchases. But aggressive?and often
abusive?marketers peddled credit to people who couldn't handle it.
There are no longer large unserved markets of creditworthy consumers,
and, indeed, many Americans are overextended. In 2007, household debt
(including mortgages) totaled $14.4 trillion, or 139 percent of
personal disposable income. As recently as 2000, those figures were
$7.4 trillion and 103 percent of income.

The resulting retrenchment of consumer spending is already being
felt.
RETAILING CHAINS CAUGHT IN A WAVE OF BANKRUPTCIES, headlined The New
York Times last week. Even surviving retailers may cut back; in the
next year, the Times said, Foot Locker will close 140 stores and the
jeweler Zales 100.

What can replace feverish consumer spending as a motor of economic
growth? Health care, some say. This is a mirage. To be sure, health
spending will increase. But its expansion will simply crowd out other
forms of consumer and government spending, because it will be paid for
by steeper taxes or insurance premiums. Both erode purchasing power.
Higher exports are a more plausible possibility; they, however, depend
on how healthy the rest of the world economy remains without the
crutch of exporting more to the United States. Another possibility: a
surge of investment in new technologies.

But what if the correct answer is "nothing"? Nothing takes the place
of the debt-driven consumption boom. Its sequel is an extended period
of lackluster growth and job creation. Somber thought. For good or
ill, the ebbing shopping spree signals that the U.S. economy has
reached a crucial juncture. It will challenge the next president in
ways that none of the candidates has probably yet contemplated.
URL:http://www.newsweek.com/id/132889

I have already spent my rebate for a new TV. I charged it to my
credit card and ordered it online from Walmart. I could have afforded
it whether I got a rebate or not, so I wasn't part of the trillion
dollar debt.

As the election approaches, the media conveniently becomes
increasingly pessimistic. At the moment the Yahoo finance page is
loudly proclaiming. "Survey: 30 percent believe economy will shrink".
The 30% referred to are economists. This is truly a case of the glass
being less than half empty, since an equally accurate headline could
read, "Survey: 70 percent believe economy will grow".
.

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