Broke-Ass Student

A new frugality could remake the U.S. economy—and American life. While some Americans have spent themselves straight into poverty, others industriously aspire to conserve and save. But is frugality a doctrine that can actually serve as a death warrant in a credit based society?

The End of Credit Card Consumerism
U.S. News and World Report
August 8, 2008

Is the insatiable credit-binging party nearly over?

Today, America finds itself at a once-or-twice-a-century economic tipping point. A sharp slowdown, record-high gas prices, high consumer debt levels, a plunging real estate market, and the growing green movement all seem to be conspiring to dethrone King Consumer and transform the economy and the American way of life for years to come. “The process of bringing our wants and our needs into realignment,” says Merrill Lynch economist David Rosenberg, “is going to involve years of savings and frugality.”

Many consumers, of course, don’t have much choice but to scale back. Total credit card debt has increased by over 50 percent since 2000. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian, and the personal savings rate has hovered close to zero for the past several years. High gas and food prices are causing real incomes to fall. Even worse, rising inflation will probably cause the Federal Reserve to start jacking up interest rates once the credit crisis on Wall Street has passed, tightening credit even further. “We’re shedding jobs, it’s much harder to borrow, and what used to be capital gains are now capital losses,” says Scott Hoyt, senior director of consumer economics at Moody’s Economy.com. “There’s no source of funding for spending.”

We continuously buy on credit and our government does the same, so are we in fact reaping what we deserve? The ripples from the bubble busted housing debacle continue to ricochet and the latest batch of stimulus checks are but a fleeting memory for the average American consumer.

Consumer Spending Heading for a Fall
Marketwatch
August 10, 2008

“Frugality is now replacing frivolity,” wrote David Rosenberg, chief North American economist for Merrill Lynch, who suggests that the consumption patterns of the 1950s could be coming back. “Ozzie and Harriett” is in; “Sex in the City” is out.

The first official data on third-quarter consumption will be released in the coming week. In addition to the retail sales report for July, the calendar also includes July numbers for consumer prices and industrial production for July, and the June figures on foreign trade. The data “should reinforce the view that the U.S. economy is in recession,” said economists for Goldman Sachs.

The developing slump in consumer spending will make it increasingly difficult to sustain positive growth, said David Resler, chief economist for Nomura Securities. If the U.S. consumer falters, then global growth probably will too. Consumers face three hurdles: Higher energy may be easing, but their wealth is still falling. And wage growth has been very weak.

David Walker, the former U.S. Comptroller General and director of the Congressional Government Accountability Office (GAO), had a job to audit the government’s books and serve as the investigative arm of Congress to ensure the fiscal accountability of our federal government. (I’ve written about him before in The US Economy Is Unsustainable.) Mr. Walker has since resigned from his position in order to hit the road and spread awareness of what he believes to be America’s precariously dire financial future coming straight down the pike.

‘I.O.U.S.A.’ a big screen look at the U.S.’ monster debt
The Washington Post / Seattle Times
August 10, 2008

In March of this year, Walker resigned from the GAO so he could be even more vocal on the debt crisis, becoming chief executive of the newly formed Peter G. Peterson Foundation, set up by Peterson, billionaire co-founder of the Blackstone Group, a major private-equity player.

Their message: You probably know that the national deficit stands at $9.6 trillion and rising. What you don’t know is how bad things really are. If you include all the unfunded entitlement obligations — Social Security, Medicare, Medicaid and so forth — we are actually in a $53 trillion hole, Walker says.

And it will only get deeper as we get older.

In an interview, Walker is full of grim one-liners, such as: “The debt has increased our risk of being held hostage by foreign lenders” and “Our situation is serious, and it is deteriorating with the passage of time” and “The financial condition of the U.S. is worse than advertised.”

The nation’s debt now accounts for 66 percent of the gross national product. But unless things change, the film argues that the cost of aging baby boomers will push that proportion to 244 percent by 2040, twice what it was at the end of World War II, our highest level of national debt.

A debt that high, even super-investor Warren Buffett says in the film, “could create real political instability.”

Our overseas brethren are feeling the pain as well.

It’s worse than we thought, admits CBI. The CBI, the UK’s largest employers’ organisation, has warned that the UK economy is deteriorating faster than it previously thought.

UK Economy ‘Worse Than Thought’
BBC News
August 10, 2008

Letters Warn of Darkening Mood in the Economy
The Guardian / Observer
August 10, 2008

Leading employers’ organisation the CBI will this week perform a significant U-turn and warn its members that the economy is deteriorating at a faster rate than it had predicted.

As recently as June, Richard Lambert, the CBI’s director-general, took a relatively optimistic view, saying we should avoid talking ourselves into recession. But in a letter to mark the first anniversary of the credit crunch, he writes: ‘There is no doubt that the mood has darkened in the last two or three months,’ and warns that growth prospects for next year and 2010 ‘look no better than anaemic’. It is the most pessimistic assessment of Britain’s economic prospects that Lambert has delivered.

He concedes that: ‘The CBI, along with most other forecasters, has been consistently over-optimistic about the economic outlook over the past 12 months.’ He blamed the volte-face on a surge in inflation that ‘took us by surprise’ and the prolonged credit crunch, which has been ‘bigger and broader than at first appeared likely. A year ago, it seemed reasonable to hope that the worst would by over by now. That has not turned out to be the case.’

Lambert criticises ‘years of unsustainable increases in government spending’, which have ‘left the public finances in poor shape to cushion the economy against these adverse shocks’, and warns Gordon Brown not to take measures which he claims would make the situation worse, including changing the Bank of England’s 2 per cent inflation target.

So what are productive solutions for a service-based society with a waning manufacturing sector to compete in a globalized economy? The situation feels like being trapped in a maddening Catch-22 with no easy answer. How do strapped Americans effectively divert a monetary crisis through conservation and savings when the foundation of our fiat currency and financial system is based off credit and debt?

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