Spare the change, spoil the child

If you spend much time at all chatting with me about the markets and the economy, you’ve probably heard my socio-economic theory on how we got here. But while I think I’m a pretty keen observer of patterns and trends, I didn’t have much hard core data to back me up… until Friday.

‘This American Life’, a radio show produced by Chicago Public Radio, has done some amazing work explaining the mortgage crisis, and followed up this past week with a show explaining the banking crisis in non-investment-geek English. I love the show and highly recommend tuning in.

Anyway, one of the experts that they chatted with was David Beim, a former banker turned professor at Columbia Business School, who has a graph that exactly illustrates why we’re this pickle… and which fits my theory exactly. Those of you who are impatient will want the graph now, but I’m going to make you wait (patience is a virtue). First, the theory.

Our grandparents (or great-grandparents, depending on your age) had a seminal event in their lives that changed how they approached everything: the Great Depression. Times were tough: unemployment at 25%, no social safety nets, record bank failures. These are people for whom thrift wasn’t just a good idea: it was the only way to survive. Credit? Not so much. Now I recognize that the credit card industry as we know it didn’t even exist until the 1950’s (Diner’s Club) or 1965 (BankAmericard) depending on how you define it. Still, the use of credit really wasn’t that tempting to that Depression generation. My 89 year old grandfather didn’t have a credit card until he was in his late 60s, and then he only got it in order to establish a credit file that was needed even though he was going to pay cash for whatever it was.

One of the things that I’ve observed (and I’m sure there’s a sociological study out there somewhere to support it, but I’m not going to go look it up) is that we all not only want a better life for our children, but most of us also want our kids to be raised differently than we were. Sometimes that takes the form of allowing a later curfew (or earlier if you yourself were a wild child). It probably also explains why grandparents and grandkids get along so well: they were most likely raised the same way and have a common enemy – the parent.

In monetary terms, though, I’ve seen time and time again that parents and grandparents continue to baby their children long past the time when they should have been self-sufficient. So the grandparents, those who lived through the Depression, provided more for their children than they could have ever had when they were growing up: dance lessons, a car to drive in high school, college education, more clothes, etc. And of course, because the children got more, they grew to expect more. Salaries hadn’t increased so much that when those kids went out on their own they could keep up the life style to which they had become accustomed, so the grandparents continued to help here and there so that their poor little darlings didn’t feel the awful pinch of want that they themselves had to live through.

Case in point? The baby boomers will receive the largest generational wealth transfer in history. Their parents not only took care of themselves through retirement, but in many cases provided the money their children will be using for retirement… unless they blow through it first. A generation or two of that, and you end up with some mighty spoiled consumers. Take a quick look around and you can see what (and who) I mean. Ummm, darlin’, don’t forget to look in that mirror over there.

So I suppose you could say I’m blaming the grandparents, but really it’s about the very natural greed of humans combined with the fading influence of the church’s (any church’s) values of charity and putting others above self. (Don’t even get me started on that here… but if you’d like to chat offline, email me.) Regardless, we haven’t spared the change, so we’ve not only spoiled the child… we’ve spoiled the economy.

How bad is it? Ahhh, glad you asked. This is where David Beim’s graph comes in (although I should add that there is attribution to Credit Suisse as the possible original source of the chart). I give to you a vision that should explain why it is that I’m not expecting this little downturn to end in 2009 (or 2010… or 2011…)



The graph measures the ratio of household debt to Gross Domestic Product. Don’t let the different lines throw you… they’re basically the same thing, but the government apparently changed the data series midway through the graph. What should you take away from this? The last time and ONLY time we Americans have had this much debt on our PERSONAL balance sheets was 1929. Folks, it's at 100% of GDP. One. Hundred. Percent. It seems apparent to me my friends that we’re in for one of those lovely life-changing experiences just like grandma and grandpa had. Fasten your seatbelts… it’s going to be a bumpy ride.