When Did Consumerism Overtake Our Nation?

“In a nation that was proud of hard work, strong families, close-knit communities and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but by what one owns. But we have discovered that owning things and consuming things does not satisfy our longing for meaning. We have learned that piling up material goods cannot fill the emptiness of lives which have no confidence or purpose.” Jimmy Carter in a speech to the American people in 1979.

This was around the time when angry Americans were experiencing extreme high gas prices ($1.25/gal) and long lines…food prices were increasing on a steady incline. This came at a time when the inflation rate in the US was already abnormally high at around 11% on an annual basis. That meant if you bought goods for a $1.00 today you would only be able to purchase approx. $.89 of the same goods one year from now. Inflation became a way of life and an expected part of our world. So, even though Mr. Carter tried to scold American citizens for their lack of self-control and gluttony, the prudential wisdom of saving for the future and avoiding debt was replaced with new ideas. “Smart” young consumers now did the opposite, forgetting the lessons of the past. Though, there was a resulting sense of abundance, it was accompanied by rising prices and anxiety levels.

I understand how they came to their conclusions and actually agree with them to some degree. It makes sense to pay off today’s debts with tomorrow’s cheaper dollars in a period of high inflation. The face value of your debt stays constant, even though the actual value of those dollars decrease. So, in general, this concept makes sense to me.

This is a similar scenario to what happened in the East and West coast real estate markets. People and banks were willing to leverage up to 100% or more on a property because they had come to expect properties to continue to go up in value. In this scenario, leverage makes perfect sense, however, only if you can afford it. Real Estate, like all markets, is cyclical in nature. It’s easy to get short-sited and ignore the lessons of history. If we ignore the lessons of history, we are doomed to repeat them! In my opinion, using leverage can be a smart way to invest in real estate and increase your cash on cash ROI…as long as you do not over-extend yourself. This last year, the real estate bubble finally burst and all the people who could not truly afford their houses were faced with reality. They had taken sound concepts and brought them to very wrong conclusions. It caused them to take on too much debt in order to purchase their properties with no exit strategy or plan for the downside. They were ”all in” and were betting that their property values would continue to increase. I’m sure they had plenty of examples of friends who had purchased a property and sold it 1-3 years later for a profit, all while making interest-only payments in the meantime. It caused so many people to throw out all conventional wisdom…in hopes of making a big score for themselves. It resulted in people making irrational thoughts and decisions.

Some people believe the current recession was caused by the “sub-prime” implosion, but I think that was just a symptom of a greater problem. I started this blog entry with a speech given by President Carter back in 1979, which addressed some of the same issues I feel we still battle today. We are a consumer nation and have no self control. The average person has a negative savings rate, which means for every dollar they make, they actually spend more…leaving nothing for savings. Does this sound familiar? It should! It’s exactly how our fearless leaders have been running this country ever since we were taken off the gold standard. Never in our history have we been so irresponsible as in the last 30 years. After going off the gold standard, the Federal Reserve and our government were given a blank check. I would argue that when the Federal Reserve was created they were given the ability to print money out of thin air, but will save that discussion for another day. I believe that was the first stage of a plan to develop a nation that came to expect debt, deficits and irresponsible use of resources. Then, they could run up debt, increase the money supply and systematically degrade the value of the dollar (also called inflation). Some people don’t realize it, but inflation is really just a “hidden” tax. Every time the Federal Reserve prints money and dilutes the existing dollars, they become less valuable. That value doesn’t just go away, it merely is transferred from the existing dollars to the newly printed money. So, remember this concept the next time you see they are printing trillions of dollars. The value of those new dollars is not incremental value added through increased production or efficiencies gained in our industries…it is simply being stolen from the dollars already in existence. If we were still on the gold standard, they would not be able to create money out of thin air. It would only come into existence if there was tangible value (gold or silver) added to our economy. Back then, it made sense to save your money and grow your wealth. Today, savers are being robbed blind. As they put more and more money in the bank, saving and scraping to build some sort of nest egg, the government is printing our money supply to levels never before seen in this country. Once this new supply filters through our economy, these savers will be wiped out! They will be left wondering how they just spent their entire lives scraping, saving and doing the right thing only to lose it in an instant…and they won’t even know who stole their money. The same thing happened to my grandparents. They worked hard their entire lives, saving and planning for retirement. They sold their business in the late 70’s and had a nice little nest egg. They had high hopes of a comfortable life in retirement. However, inflation raped them of their money and they lived most of their retirement years in poverty. They didn’t even know what hit them or who was responsible for it. They just knew they had done all the right things and were left with nothing to show for it.

I’ll stop there for now…but I’ll write more in a later post.

Cameron Long, CPA
www.PassionForGreatness.com