What Do You Do With All The Stuff?

Early in my business career in the early 1960's the United States passed through a barrier, although it was scarcely noticed at the time. That barrier was one where supply and demand became imbalanced. There were a lot more things available than there were people to buy them. What were we to do with all this excess stuff?

First, let's go back fifteen years before that, when we were fighting World War II. The war effort had first call on all material not directly needed for survival. You couldn't buy a new car because Detroit was making tanks and planes. Consumer items from meat to gasoline and a host of other items were being rationed.

During the late '40's we made the transition to a peacetime economy and converted those factories back to making consumer good. I can remember my Dad trading in our 1936 Packard for a 1948 Dodge, which I think might have cost $800. During the Eisenhower years of the '50's we saw further tremendous gains in productivity. All of a sudden there was a lot of "stuff" available to buy, and incomes were growing so the demand grew also.

At this time we also saw the beginning of the modern advertising industry, Madison Avenue, if you will. It was the job of those agencies to come up with programs to stimulate demand even further. And, boy, were they successful.

That was over 40 years ago. Today gazillions of ads urging you to buy all this excess material factories are putting on store shelves and in showrooms. As a result we have made the transformation to a consumer driven society. How and at what rate consumers spend their money now seems to be the central issue which concerns the Federal Reserve Board and other economists.

From a purely economic standpoint, the increase in demand created a core inflation which occasionally got out of control, as during the late '70's which ended up driving the great run-up in interest rates in the '80's. It has also led to our tremendous trade imbalance. It seems that our own factories can no longer keep up with the demand that has been created!

Another factor was entered into this equation. CREDIT! It seems that American manufacturers and agencies had created in the minds of consumers a greater desire for consumer good than people could afford. People were saving more back then, but most people did not have enough cash in the bank to pay for what they wanted. Enter your friendly banking system.

The result was a virtual explosion of credit! You don't have to be able to afford something if someone else will give you the money to buy the newest, latest, best thing that has come on the market. I can remember the first Visa card I got over 40 years ago. What a deal! Of course, the limit was probably $1,000, more than my then monthly income.

American banks have never looked back. Whether it was autos or household appliances or homes, easy credit drove the economy. When rates went up, consumer spending went down, and the economy tanked. In times of lower rates and easier credit, the economy did well. Just look at the last few years. During the refinance boom more than half of home loans were larger than the debt that was retired, meaning people cashed in some of their equity. What did they do with it? They trundled down to their local stores and spent it. Some economists feel that their actions are what kept the economy from slipping into another recession.

I look at the mortgage industry today and I have never seen lenders more eager to get rid of their money by funding new loans. Credit standards have eased even for "A-paper" borrowers and the sub-prime lenders are raking in profits hand over fist. The profits border on the obscene, and people keep borrowing and keep buying.

The loosening of standards has finally come to the attention of regulators who, I suspect, are about to require that some of the most liberal practices be stopped. I think that it is certainly time for that. Our industry just does not know what is going to happen if rates go up past the point of people's ability to make monthly payments. Personally, I think that property values will rise enough to bail them out and that there will not be blood in the streets. I hope not, anyway.

In the meantime, I think it would be a wise idea for you and your family to sit down and have a serious financial strategy session. The first thing I would do is cut back spending plans. Don't buy stuff you don't need. Second, work out a plan to eliminate consumer debt like credit card debt. Adopt a plan to pay it down to zero in a defined period, like 2 years. Then you can look at your mortgage, the biggest one of all, and see how you might reduce the term of your home loan by making extra principal payments as you are able to do so.

The bottom line, is that debt starts out being your friend because it allows you to buy the home, for example. After than, treat your debt as your enemy and get rid of it as quickly as you reasonably can.

Be careful out there!