The american consumer today can be summed up as having the "whats the monthly payment?" mentality towards purchases. As long a monthly payment is even possible to do, a purchase will be made even if the purchase makes no sense at all. You can see it in purchases of furniture, vacations, cars and especially real estate. Monthly Payment syndrome has transformed the US consumer into an animal that basically spends absolutely every cent they make as they make it, with no savings being accumulated. In past generations aging parents usually had a bit of a nest egg that they were planning on passing down to their offspring. I believe going forward, unless things change, most parents will be spent out at the time of their passing, perhaps even passing debts down instead! While the process of monthly payment syndrome has allowed most people to live quite a respectable looking lifestyle, it has also caused a total lack of understanding of value. By expanding payments over time, consumers are able to become sort of like a stock for a company. The share price of a company is determined by the companies total profits over all time, divided by shares. Share prices fluctuate as the future prospects of the company rise and fall and investors regauge their numbers. In this loose sense, the consumer is taking their total earnings for all time going forward, and spending it in the current time. Almost every penny is budgeted per month, and as more income is made, more monthly payments are incurred. The US consumer is "Priced to Perfection" to borrow another stock term. Any stop in income flow or stop in income increases will throw the system into dissarray. This mentality is going to be tested I think in the near future by two major occurences:
1. Unemployment is going to rise
Mortgage lenders are laying off people in massive numbers. Residential construction is falling off a cliff. The consumer is tapped out (witness a negative savings rate over the last year, first time since the GREAT DEPRESSION), realtors are struggling, and all areas related to real estate are going to get pinched.
2. Home Values are falling and will continue to fall
In a previous post I noted that a house is sort of a forced savings plan. Homes have been used as an ATM the past few years, and ever escalating home prices were seen by the consumer as a never ending source of credit debt payoff. Thats all over now, and as the single largest monthly payment item most have falls in value, there is no rescue from crushing debt.
Whats all this mean? I dont know, but I imagine a gradual return to more reasonable living standards will occur. What a shift in mentality from "spend everything all right now" to "spend what is reasonably comfortable" will mean to the stock market and economic growth is hard to say. I dont think it is going to be good though.