October 15, 2009, 5:00 am

Americans Consumers Are Like Children

by: The Financial Blogger    Category: Pay off your Debts,Personal Finance
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kid-moneyAs several of you already know, I have 2 children; William and Amy. What is fascinating about William is that, even though he is only 4 years old, he is already acting like a young consumer (or are consumers acting like 4 year old kids?). When I catch him doing something I don’t like (such as jumping off the couch with the purpose of getting as close as the TV as possible, like scuba diving and swimming in the bathtub or eating cookies while hidden under the kitchen table 😉 ), he tells me that he won’t ever do it again.

As long as I am around, it is true that he doesn’t jump off the couch again. He knows too well that a consequence would follow faster than he can run. However, the minute I am gone, one can only guess what he will try!

Going by the title of this article, William represents the average American consumer, I am incarnating the recession. Depending on my mood, I can become the Great Depression or simply a small increase in the unemployment rate ;-). More seriously, there is a question that needs to be asked: “Are Americans spending less because they have learned to become frugal or simply because they have less money in their pockets?”.

2 weeks ago, I had read an interesting article from James Surowiecki from the New Yorker called Inconspicuous Consumption. The author explains that a recession often forces people to spend less simply because they have less money to spend.

If you lose your job tomorrow morning, chances are that you won’t buy a new 50’ Plasma TV to watch Monday Night Football. You will keep your old TV and buy the cheap beer this week. Do you become more frugal? Not really, you are just broke! Would you buy the TV and have the Super Bowl party once you get a new job? If you just lost your job, the answer is “no” but in a few weeks, once the money starts to come into the bank again, you won’t bother much about being a tightwad.

Another interesting point reported by Surowiecki is the serious improvement in many goods that we used to purchase more frequently. Cars for example. Who needed a brand new car every 4 years? If you can afford it, this is fine. But if you can’t, you can easily drive your 8 year old car for miles without many problems. Therefore, you are spending less based on the productivity and efficiency of the products you bought a long time ago. Programs such as cash for clunkers, showed that there were a lot of people waiting for a better financial situation to buy a new car.

The article was relating stories from the times back in the early 90’s saying that America had changed their spending habits and will start spending more responsibly due to the terrible consequences of the recent recession. We are now 20 years later and we still haven’t learned a thing ;-).

So, would American consumers start spending money right after the recession is over? The answer is “probably”. If we simply look at 2009 stats, spending habits have been increasing for 4 months in a row and we are not even out of the recession yet. Will they overspend and load their credit cards like kids in a Toys “r” us? I don’t think so.

The issue is that most people already have a lot of debt. Therefore, they may consider paying them off before buying more stuff. In addition to that, banks will be less likely to offer mortgages at 125% of property values, so the average American consumer won’t be able to get even more money out of their homes like when they were like ATMs. There is no more juice in the lemon and they can’t afford to buy another one.

In the end, recessions will teach us great lessons, however, we are better off writing them down in order to not forget them!

image source: digital sextant

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Comments

Very true, it’s kind of like the idea where the easiest time to get into debt is as soon as you have just dug your way out of a hole.

I actually think Americans are spending MORE now and more than they’ve ever spent this year. It’s an absolute bull market and you can feel it on the streets.

Recession is over and you can never count out the US consumer!

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