We so quickly forget how good we have it. Between instant communications via cell phone or “push to talk,” big screen hi-def televisions, the latest in pharmaceutical advancements, more leisure time than we can use, houses that are 3 times the size of our grandparent’s homes, and every ounce of knowledge ever known to man available via the Internet, we enjoy a standard of living that wasn’t even dreamed of by our forefathers. But could years of overspending and buying on credit put our vaunted standard of living in jeopardy?
Standard of Living is defined in Wikipedia as:
“The quality and quantity of goods and services available to people, and the way these goods and services are distributed within a population. It is generally measured by standards such as inflation adjusted income per person, poverty rate, access to and quality of health care, income growth, and educational standards. It is the ease by which people living in a time or place are able to satisfy their wants.”
The ease by which people are able to satisfy their needs or wants is the part that concerns me.
There is some good news, though: The middle class isn’t disappearing, it’s simply moving up. The Census Bureau reports that the share of US households earning $35,000 to $75,000 a year (the middle class) has shrunk slightly over the last decade, from 34 percent to 33 percent. But so, too, has the share of those earning less than $35,000, from 40 percent to 37 percent. It’s the share of households earning more than $75,000 that’s jumped! It increased from 26 percent to 30 percent.
But the problem I see going forward is that the people moving up are using their newly
found earned dollars to finance a standard of living beyond the modest gains they’ve achieved in income. For the average people on the street, “things” have become synonymous, even identical, to wealth. They associate their stockpiling of “stuff” with “being wealthy,” and consumers have been well outfitted with the latest and greatest during these bubble times. The availability of debt at ridiculously low rates and the glory of status from having “things” (new word: status-faction?) because of debt slowly grinds away the values and common sense our grandparents possessed.
Exhibit One: The last 30 years of growth in consumer spending … which could only have been financed through borrowed money because it has outpaced the growth in consumer income. Debt gives consumers the ability to live beyond their means while keeping some cash on hand … until the payments come due. The problem with payments is that they make it so much easier to get the next big thing, and a great many people have adopted a “payment mentality” lifestyle, accumulating houses, cars, boats, RV’s, vacations, jewelry, and other things.
Exhibit Two: The rise of the “home ATM.” Consumers have used their homes, once the bastions of wealth accumulation, as automated teller machines, pulling out their equity to finance things such as fabulous vacations, college educations, plastic surgery, and vehicles (Exhibit Three coming up). Equity lines used to be used to improve the home, to add a bathroom or finish a basement, but with the advent of easy credit and the perpetual re-fi, homeowners began turning their homes into palatial showplaces, complete with Italian marble, double refrigerators, kitchens large enough to be a television studio, and then the landscaping, oh the landscaping. Of course, next comes the HGTV-ification where the interior is so thoroughly and masterfully designed that the home looks like a magazine shoot. All accomplished with debt.
Exhibit Three: Fog a mirror, get a car loan. Am I the only one amazed by one of the biggest false signs of prosperity: the “tricked out” car? Consumers have bypassed common sense for a false sense of reality, thinking they deserve the biggest, the best, the most luxurious, most customized vehicle ever constructed and true income doesn’t matter. People with very average incomes have managed to purchase luxury Lexus sedans, huge, option loaded Escalades, and sporty BMW’s. Then, like the bloated home purchase, they outfit their new debt with expensive aftermarket wheels, 20 inch tires, and stereo systems you can hear from the next county. Just try to go onto a car lot and find stock, solid-transportation. These vehicles are no longer sufficient for the spoiled masses enjoying an overdrawn standard of living. Debt has funded the majority of these exorbitant purchases, yet we call it “prosperity.”
Exhibit Four: The recurring lifestyle expenses never seem to end. Cable television packages, the satellite dish, XMSirius radio, cell phones (with custom ringtones), country club memberships, gym/pool memberships, Club Penguin, coffee of the month club, maid services, movie clubs, car alarm services, and all the “services” we use on a monthly basis that require a monthly payment aren’t really living expenses. They’re lifestyle expenses. And using credit to finance them is always a terrible idea and always irresponsible. But we have an entire economy predicated upon it.
With the housing market imploding, escalating costs of living, a devalued dollar, and an impending recession, Americans are now saddled with a massive federal bailout of Wall Street’s careless financial management, and the nationalization of some of the country’s largest banks, who’s CEO’s are all making 100+ times the average worker. The squeeze on our standard-of-living is working it’s down to Main Street, and is slowing down the middle class spend-o-rama, as retail sales numbers are starting to fall off a cliff.
Debt is like a drug and we’ve been abusing it. When the standard of living bubble bursts, it will result in some rather unpleasant withdrawal pains. People who have grown accustomed to the spending free-for-all that debt offers will probably be slow to accept changes which require a longer time horizon. And there will have to be some reshuffling of priorities. That cell phone may NOT be such a necessity as Mr. and Mrs. Average endure a stifling credit crunch, growing interest rates, inflation, tens of thousands of home foreclosures, a job market squeeze, cut-off home equity lines, skyrocketing federal, state, and local taxes, and no more low interest credit cards. I predict there will be anxiousness, nervousness, and an unsettled spirit amongst the masses, especially from those who have never had to live within their financial means.
In order to contain the fallout from years of poor decision making on both the personal level and the government level, there will be mountains of socialistic legislation aimed at sustaining the bogus prosperity a bit longer. Central planners in Washington will act on the notion that the unhappy reality of hitting bottom can be delayed while they’re in office … let the next administration deal with it.
The impending bust will affect us all, regardless of whether or not we partook in any of those easy-credit binges.
[tags]bubble, banking, bailout, finance, finances, recession, wealth, standard of living[/tags]