I Want It All . . . Later?

By James Schaefer

In a recent opinion piece in the Wall Street Journal, “For My Dad, the ‘New Normal’ Is Old Hat”, John Bussey writes about his 91-year-old father’s austerity, and how that behavior has become the “new normal” (link).

The 1980s were sometimes referred to as the “I want it all now” decade.  And so it was, for a while at least, until a significant market correction — a drop of about 25% — occurred in October 1987.

The 1990s saw the dot-com boom, ending with a more severe a market drop — this time around 36% — spanning March 2000 to October 2002.

Then followed another boom in the mid-2000s, fueled by easy money and rapid real estate appreciation, allowing home equity to be used as a personal ATM to feed consumption, and drive demand artificially high for electronic gadgets and European sports sedans and “starter-castles”.

It was a house of cards, and it ended disastrously for many families, with home prices correcting — and the market losing — variously between 30% and 50%.

In statistics, if something happens once, it is an event; twice, and it is a coincidence; and three times, a pattern or trend.

There is a pattern here, a cause and effect behind these three events.  Who survived comfortably, and who struggled?

Through it all, over the past thirty years, a huge portion of American households have survived market drops and recessions, and have prospered.

They have positioned themselves to remain secure during recessions and job loss, and to take advantage of the subsequent boom in market shares and the recovery of the economy that normally follow market drops.  And it has not been an accident.

They have lived below their means.

Following the September 2008 tanking of the stock market, the 30 industrials were up 22% in CY’09 — including the market low of 6600 in March 2009 — and up an additional 11% in CY’10, repairing much of the damage to portfolios.

At nearly 310 million souls, America is the world’s third-most populous nation, and with that population comes ongoing demand.

How we balance that demand — between what we need and what we want — helps determine our financial stability during recessions, and job loss, and market drops.

Life is full of trade-offs, and how we approach those trade-offs will determine much of our future success.

Upon leaving high school, do we begin working, or do we go to college?  As wage-earners, do we consume now, or save and invest for the future?  Do we live below our means to ensure future security, or live above our means, and pay enormously for that decision in our later years?

As business managers, we review CapEx proposals and new hires and expansion plans; we balance risk against the soundness of the firm and the need to position our business for future growth.

Government faces these same difficult decisions, about spending on what it needs versus what it wants; between spending now, versus the need for long-term health of the nation’s economy.

Federal spending, currently 67% beyond revenue and representing over 25% of the economy, is unsustainable.

Correcting the debt problem by taxing personal income, business income and capital gains is the equivalent of blood-letting by leeches in an attempt to cure a sick patient.  Those taxes literally take the life-blood out of the economy.

Whether fact or perception, all tax increases are permanent, all spending cuts are temporary, and all entitlements, once enacted, are forever.

It is time for some tough love.

We are in this together — Democrats and Republicans and Independents alike — and we need to remember that we have much more in common as Americans than those things that make us different.

It is time for prudent debt reduction, and responsible consumption — sufficient to keep the economy going, without creating false demand driven by debt-fueled consumption of discretionary consumer goods, and yet another cycle of boom and severe market correction when that demand falters.

It is time to take the long view.

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