Stocks - November 2008

Our Own Bad Selves Recently in this column, I addressed the source of the financial disruptions now being experienced as yet another manifestation of the boom/bust psychology that has occurred repeatedly throughout our financial history.

To look at the media’s coverage of this situation, however, you’d think that we are nothing but a nation of victims — totally and haplessly screwed by the thieves and crooks on Wall Street. Yeah, there is greed and corruption in the banking system and on Wall Street. That is undeniable. And yes, in Washington, the very politicians who regulate the financial service industry are the beneficiaries of their lobbyists. No conflict of interest there.

But by no means is that the whole story. In fact, I would submit that the current financial crisis we’re witnessing has its roots in, and is a consequence of, a deep cultural problem.

You want to know the real story? It’s not hard to find. Just take a look in the mirror, and you’re likely to see it staring you square in the face.

The two charts below tell you just about everything you need to know about how we got into this situation.

This first graph is a picture of our Personal Savings Rate. Look at it carefully.

In 1980 we Americans saved roughly 10 percent of our pay. Today however, we save nothing. Nothing.

But we sure do spend. And much of it is borrowed — which takes you to the second chart.

It’s the household debt-to-income picture. Look carefully at the period around 2002. From that point forward, we Americans, as a whole, have actually been spending more than we’ve earned in total. In fact, today, on the average, we spend $1.30 for every dollar earned.

So let’s see. Thirty years ago we saved roughly 10 percent of our pay and our debt-to-income was roughly 60 percent. Today, not only do we not save so much as a dime, we actually spend upwards of 130 percent of our pay — and we have financed it to boot.

Our parents never lived like this. We boomers and our kids that have followed have to be the most unbelievably irresponsible, selfish, narcissistic and economically illiterate generations ever. We wanted our toys; we wanted our lifestyle, and we wanted it now. It doesn’t matter whether we could pay for it. Finance it! Don’t worry, be happy. So long as we could find a way to make the monthly note, full steam ahead, damn the torpedoes. And the banks and lenders were only too happy to accommodate us.

What the Wall Street bankers did is really no different than what a saloon keeper does when he serves a drunk. Paraphrasing the current slogan for Visa, “Life does come at you fast.” And we wonder how such a financial mess as we have now could have occurred in the first place. Once again we have met the enemy, and I’m telling you, it really is us.

Well, the credit party is over. And it seems the hangover will be proportionate to the binge. Goodbye Aquarius. The song of this new age is well likely to be: “This is the dawning of the Age of Austerity.”
Bo Billeaud has been president and chief investment officer of a Lafayette-based money management firm for the past 18 years. Contact him at [email protected]._