No More Living on Promises and Plastic

01/02/2012 11:00 am EST


Terry Savage

Author, The Savage Truth on Money

America will have to learn to grow without expanding consumer debt, and it is possible, but it will mean a reality check for many, says personal finance expert Terry Savage.

Terry, I know you’ve written a lot, you even write for Have you noticed in your travels all over the country any change in attitude toward wealth and money since the financial meltdown of 2008?

Oh sure, it’s had a huge impact, Karen. I think Americans in general have redefined prosperity from the old definition of having things to the new definition of having financial security.

It’s no longer two cars or the hottest car or the biggest house with the most bedrooms, actually. Now it’s about paying down the mortgage, paying down the debt, and having some money set aside safely. That’s the goal of most Americans, and you can understand it given the times.

We’ve gone from optimism that we could afford the 3,000-square-foot house to all of a sudden the new normal, which is pessimism. Do we have enough to live on?

I've got to take you back on that. I’m not sure it’s a case of the difference between optimism and pessimism. I think we’ve gone from fantasy to reality.

This reality has been the same forever, but history says there’s always been these cycles of boom and bust, of greed and fear, and things are always taken to extreme—that’s just human nature. Now we’re bouncing back into the reality zone.

That doesn’t mean that America’s not about to grow again—it will—and this time around we’ll have a generation that will be a little skeptical of the promises of free this and free that and got to have it all. That’s the generation that came as children of parents who lived through the Depression.

Now think about it today: If you have a family home where there are these decisions being made—we can’t go on vacation this year, what are we going to do about the mortgage—12-year-old kids, 15-year-olds are learning lessons that are very valuable as they grow into adulthood. They’ll be very much more careful about debt.

That’s what I’m thinking. Debt and credit, we will no longer use the house as an ATM, we will no longer use the credit card to pay for the way we live every day. That is the seminal shift, don’t you think?

It is, it’s a big shift. There are people out there lamenting the fact that we can’t get consumers to spend again, that they’re paying down their debt, and consumers are.

The savings rate went negative in 2005, as people lived on the proceeds of their house on their home-equity loans. Now, yes, it’s a very, very big shift. It’s not necessarily a negative one. America can grow without consumers going head over heels into debt.

But, consumption is 70% of the economic growth of this country, and if we’ve pulled back does that mean then we’re going to see a period of slow to no growth?

We may see a long-term sideways period—we’ve seen those before. It’s not just the 30’s, that was a terrible decade, but the 1970’s, the stock market and the economy basically went nowhere.

An economy can grow without overwhelming consumption. Take a look at the Chinese economy. You know, they’ve actually constrained their economy, although they’re having to give into this desire for consumption now, and they grew dramatically.

If you’re not consuming at home, how do you grow? It’s by exporting goods, and we’re in a position to export services and technology as well. There’s a way to get the economy growing without putting it all on the back of consumers.

Let’s hope that we can work our way out of this.

I think we will. With the right tax policies, growth is the only answer, the only way out.

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