For the last couple of months, the stock market has climbed almost as fast as it fell around the end of last year. A lot of people were wondering if this was a sign that the recession was over. I've read some predictions that the stock market could get back to its former highs before the end of Obama's first term. I'm not an economist; the fact that I've tried to make money writing fiction should reveal a lot about my lack of wisdom in all things financial. But, in my own admittedly limited corner of the world, I just don't see the recession ending soon. In fact, I think there's still a lot of gloom and doom ahead, and wonder if the current stock market rise isn't just a bubble following a bubble, filling up more with hope and hot air than with any actual money.
My main argument lies in the familiar phrase, "Shop til you drop!" As near as I can figure out, we, the American consumer, have dropped. And, we aren't going to be able to get back up until we shed all the debt that's weighing us down. A lot of people I know, myself included, made liberal use of the easy, inexpensive credit that was available for much of the last ten years. It was easy to borrow money when you felt confident that the day would come when you'd just blast away all your debt in one big lump. After all, incomes kept rising, the economy was good, and the money in your 401k completely dwarfed your total credit card debt. Also, there was all that home equity to draw on. And, if you did get into trouble with one credit card, no big deal. You had a dozen other offers waiting in your mailbox, waiting to carry your balance at 0% interest for a year.
Now, all these assumptions have been shattered. Credit cards I've carried have arbitrarily bumped my rates even though I've never missed a payment. The offers I get for new credit cards still have intriguing teaser rates, but the rates that follow look worse and worse. I can't count on my income rising; I can name a dozen employers who've frozen salaries, including my own. I also can't look at my 401k as this magical pile of money that only gets bigger; I had a year to watch it bubble down to almost half its high. And, while I have a comfortable margin of equity on my house, I do worry that, if I had to sell it, I couldn't get what I think it's worth.
After a year like this, any sane, rational person has to think twice about borrowing more money. Rather than carrying debt cheaply until the day when you can blast it all away, I think many people have made the same choice I have: Stop buying stuff on credit, double up on payments, and develop a multi-year plan to wipe out debt. Maybe once all my current debt is paid off, I'll consider taking on some new debt, but I doubt it. I think it's going to be five years, maybe ten, before I forget the lessons I've learned this year.
Maybe I'm a rare individual to feel this way. Maybe only, say, 10% of people have been scared enough by this recession to swear off credit. For our consumer driven economy to suddenly lose 10% of its shoppers is a scenario that has to keep economists awake at night, sweating feverishly. If retail stores see sales drop by 10%, then they'll wind up cutting employees. Factories will get 10% fewer orders, so they'll cut employees. And, as unemployment keeps rising, more and more people who still have jobs are going to cut back on expenses as the possibility that they might lose a job becomes ever more real. Or, if they feel secure in their job, perhaps they'll worry about stagnant wages. Or, if they have money in 401ks, perhaps they'll be saving extra to make up for employers cutting matching funds, or just to build a buffer in case the stock market plunges again. All these things argue for subdued sales for months and years to come.
Again, I don't have hard data to back this up. I mainly have conversations with friends and coworkers; the number of people I know who are underwater on their mortgages is pretty amazing. And, the number of people I know who are going to make less money this year than last year is also pretty high.
So, after this little economic bump from cash for clunkers and the reliable retail boost of back to school sales, I think we're going to be in for a really tough fall and an absolutely Scroogish Christmas.
Of course, there are few counter arguments, ones I don't lightly dismiss. The most obvious one is that retailers are really good at figuring out how to pry cash out of our pockets. I used to never eat at McDonald's, but this summer they've been pricing all soft drinks at $1, and now I can barely drive past a golden arch without feeling thirsty. A lot of the restaurants I used to eat lunch at charge $1.95 for a soda these days. McDonald's has figured out a way to make me give them money I wouldn't have a year ago, and make me feel like I'm getting a bargain out of it, even though their actual cost on a large soda is probably mere pennies.
And, it wasn't long ago I bought a new pair of jeans at Walmart. The price was $8. It caught my attention; I'm not someone who ever went to the mall and paid $80 for a pair of jeans, but $8 looked like a typo. Instead, it was real, and the jeans were good ones. Honestly, you just can't mess up denim too badly. And, now, when I go to walmart, I find myself wandering into the clothing section to see if there are any other bargains.
Also, I can't help but notice all the $300 laptops these days. I don't need a laptop. My current one is barely two years old. But, gee whiz, $300 is, like, a tenth of what I paid for my first computer. I can't help but look.
Admittedly, I'm not going into debt buying my dollar sodas and eight dollar jeans. But, every time I go into a store and come out satisfied I've gotten a good deal, I find myself happy to go back into that store at a later time. So, perhaps the retailers of America have my number, and my five year plans toward fiscal independence from debt are going to be cracked by offers too good to refuse. Maybe a year from now, I'll be looking at a $200 laptop and thinking, "You know, that's really a steal," and I'll have the cash in the bank to buy it... then whip out a credit card to buy another couple of hundred bucks of new software to get the most out of the new machine. I mean, I don't play a lot of video games, but it seems like a waste not to test out a new computer with a really graphic heavy game. And, in this slow, step by step way, irrationality will again seep into my personal economics, and the economy will roar again.
But by December? I just wouldn't bet on it.