THE FRAMEWORK OF CONSUMER SPENDING
Filed Thursday, March 27. 2008
The reason the economy is in a tailspin is because there are a growing number of beta consumers who can’t adhere to the same hierarchy of spending levels as Alpha consumers.
There needs to be a good explanation about what’s going on in the economy and why there’s such turmoil. The experts don’t seem to have a good explanation of what has happened and those who say we’re coming out of it don’t seem to read all the charts. While it was just announced that mortgage applications are up in the last month, a high percent of those are just refinancings. In a March 23, 2008 article by Michael S. Rosenwald in the Washington Post, a chart shows that consumer debt (excluding loans backed by real estate) has nearly doubled in 10 years ($1.32 trillion in 1998 versus $2.52 trillion in 2008), according to the Federal Reserve. There are various explanations for this huge increase. Mine is that the more you bring in cheap labor, the more you put an irreparable crack in the well-established economy that everyone is tied into and the economy that everyone has bought into over the years. There are three levels of consumers. Alpha consumers are the traditional levels of upper- and middle-class people. Beta consumers are the he cheap labor coming in and those Alpha consumers become underemployed. Gamma consumers are the people on fixed incomes or various assistance programs who are dependent on government subsidies. Different consumer levels spend at different speeds. If the Alpha consumer group slows down, shrinks or even changes spending habits, the overall economy really feels it. If more Alpha consumers lose their employment and slip into being underemployed, their spending diminishes to a beta consumer. If they try to maintain an Alpha consumer way of life, their credit usage shoots up. This seems to be clearly evident based on the Federal Reserve chart on consumer indebtedness. The Gamma consumer is at a fixed income level and may be reliant on various government subsidy programs. They don’t have a powerful impact on the economy from a spending perspective. The American Dream Hierarchy Most people have bought into the American dream of owning a house, having a couple cars, having a lot of technology, subscribing to various services and having a good education not only for themselves but for their children. After years of “being sold” on the dream and buying into it, people have established significant buying habits. They have accumulated wealth and have created long-term debt and payment liabilities that have defined a specific credit score for them. So many things are dependent on that credit score. The interest rate you can get for a house loan, an auto loan, a home equity loan and even rates for credit cards themselves are all dependent on that score. That credit ranking may be the final answer on whether you qualify at all. With companies bringing in cheaper labor, they are upsetting the complex churning of the economy from several perspectives. They are getting cheaper labor. While this is perceived as good for them, many of those cost savings haven’t been passed onto the consumers. Instead, they have been used to create mega bonuses for executives, fund failing initiatives and in some cases more value for the shareholders. The drawback is that the cheap labor they bring in isn’t cheap and the costs have become a burden to the consumers. They have put a strain on schools, hospitals and other institutions that require more funding to handle the increased demands. The Alpha consumer is the backbone of the economy. Since the economy is driven by consumers, we should try to keep as many people in this category as possible. If anything, this level should be expanded. If there’s a consumer spending slowdown, everyone feels it. Others are seeing this affect their livelihood and career. One reader points out: As the marginal cost of U.S. education increases at four times the rate of inflation, higher learning slips out of reach for most of us who have worked for access to the middle class. After $150,000 invested in education for myself, I have to place my equilibrium price point above that of the imported competition. If we upset the balance of alpha, beta and gamma consumers, we damage the economy. The erosion of alpha consumers has been happening for at least the last eight years. To me, this clearly fuels the acceleration of credit indebtedness as depicted on the Federal Reserve chart. Look at all the layoffs in technology, financial and other industries. Some have lost positions that paid $80,000 to $125,000 back in 2000 and 2001. Over the years, many of these degreed people have taken lower-level jobs that bring down their salaries by one- to two-thirds. As you multiply the number of people slipping into the beta category, the economy takes a permanent slip and credit usage skyrockets.  More Beta Consumers Create an Economic Collapse Why do we still have a skyrocketing rate for foreclosures, huge underemployment of highly skilled workers and billion-dollar deficits in local and state government budgets? My observation is that as more people get pushed out of good-paying jobs and those jobs get filled by cheap labor, the economy slides down another notch. Beta consumers can’t buy into the full American dream hierarchy. Credit card usage goes up as Alpha consumers who have slipped to beta status think it’s a temporary setback rather than a permanent repositioning of their wage-earning status. Underemployment is more critical to track than unemployment, which in today’s economy is a worthless statistic. The unemployment metric has been so massaged that it’s no longer relevant when it comes to measuring the health of the economy. As this has progressed, some already predict a collapse and not a recession. One person pointed out in feedback to another article: Mass terminations are the underlying cause of much of the $1.2 trillion increase in consumer indebtedness since 1998. Whether you agree or disagree with this assessment, it’s more realistic than what I have been hearing from people sitting on Wall Street. If you disagree, go out and buy a new car and stimulate the economy. Carlinism: We are in a downward vortex of bad economic times that few understand. Not modified Trackbacks
Trackback specific URI for this entry
No Trackbacks
|
Powered by
Serendipity 1.2