What Doth the Future Hold?

Last week I talked about the transformation of the American economy into one that is consumer based, meaning that much of the health and growth in the economy comes from consumer spending. We also discussed the fantastic expansion of the credit industry that allows people to gratify even the most whimsical desire.

In the last few years we have seen another transformation. In the 1990's stocks were the hot thing. People remember the debacle after the blow up of the dot-coms, because it seemed like it happened just yesterday. What they forget is that the decade of the '90's started out with the Dow Jones Industrial Average at 2810. Compare that with today's closing average of 10,412.

A large chunk of that money became available by virtue of the creation of so many 401(k) accounts which became popular at that time. They were a good idea, certainly, but their attractiveness was helped along as so many employers eliminated the traditional retirement benefit programs. Just like the IRA that had been created 20 or so years before, a tax-advantaged program stimulated savings. The stock market was good and it got even better as so much money flowed into it during that period. Any time demand exceeds the supply the price will rise.

So what happened in the 2000's when people's stock portfolios tanked? I think that many of them turned to real estate. All that money came out of the stock market and became the down payment on property. As a result, we have seen the huge increase in values in housing. We also have seen a lot of speculation as people bought property not for its utility value - as housing - but for the opportunity to flip it to someone else for a quick profit.

Let's make the assumption that the next leg of the cycle starts with the real estate market cooling off somewhat. By that I don't mean that a bubble will burst, but that the appreciation rate will slow to more moderate levels. Homeownership will still be attractive but it will not involve as much rank speculation as we have seen recently.

I rarely get suckered in to making predictions about the future, but five years ago I said that I thought we were on the verge of a repetition of the Eisenhower years in the 1950's. I did not foresee this huge rise in real estate values but other than that, I have been pretty close. Indeed our economy is going at a reasonable but not robust clip, unemployment and inflation seem under control, and interest rates are still at levels that are attractive to borrowers. Personal income continues to rise modestly. What happens next?

I think that will be answered better when we have a handle on what happens to all that money? Is it going back in the stock market? Will it continue to go into real estate? Maybe it will just join the huge amount of money that is in CD's and money market mutual funds.

What I hope happens is that people start undoing some of the less constructive things that they have been doing lately. For example, those who destroyed their home's equity by taking out a HELOC might be encouraged to start paying it back. I hope that we see that balances on revolving accounts such as credit cards might actually decline as people paid them off! Boy, would that be news. And how about those interest-only loans and negative-amortized Option loans. Refinance them to more appropriate loans.

The point here is that a lot of money has gone into investments that have done well, creating a great deal of wealth, whether it is in the stock portfolio or in home equity. Now it's time to protect that wealth, both individually and as an economy. It's time to get our houses in order. Let's start working on reducing our personal deficit spending, paying off debt and putting money aside in some kind of savings vehicle. We should encourage our leaders to do the same at all levels of government, and to reduce our trade imbalance.

What I am arguing for is a less exciting, less flamboyant future. There won't be as much for us to brag about at cocktail parties, but we will sleep better and know that we have created a more solid foundation for our children's future.

Be optimistic out there!