I have not heard much talk about this topic but I believe that we are in the middle of a tremendous financial change in our country that has taken place over the past two generations. While this has been a fairly slow transition, its implications for our society and our nation are hard to over state.
cash to credit
The WW2 generation lived on a cash economy. Their habits were forged in the Great Depression and World Wars. Borrowing money was expensive and debt was socially unacceptable. People who could get a mortgage to buy a house, paid it off. Often as soon as they could. There were no credit cards and people were good for their word and a handshake.
Those times and those standards are gone and their children, the boomers, started that change. Rejecting their parents conservatism, they helped create the stock market booms, bank reforms and credit card economy. A cash economy is hard to grow and lending was good business and good for business. Making money and borrowing money became more socially acceptable. People got bigger homes, fancier cars, more stuff.
GenX and GenY are almost completely different from their grandparents. People today buy almost everything on credit, either a credit card or a loan. Things have changed so much that few people ever pay anything off. Leasing has has become the norm. Christmas presents go on credit cards, savings has all but disappeared, and much of people's income goes to services that did not even exist 30 years ago.
There are several forces causing this change and several symptoms of it.
education and money taboo
One of the main causes of problems is that American's are uncomfortable talking about money and few households know the first thing about finance or economics.
Even though we live in a capitalist nation, money is still a taboo for most people. Schools do very little to teach citizens about how to handle money. We just dont talk about money or investing or fiscal responsibility. It's not "polite." Money is a secret or a competition, even more so within families.
Instead we talk about what we can buy, what we did buy and what we want to buy. The only time most people talk about money is when they are arguing about it. Money problems are one of the main causes for divorce. I would even argue that money is one of the main things that divides people in our country although we usually blame race and culture instead.
Few people can explain simple concepts like the difference between an asset and an expense. Is your car an asset? Is buying a luxury car a better investment than buying an economy car?
The lack of financial education has many important and mostly negative effects. It also allows a small set of professionals to "manage" our economy in ways that help the riches of the rich while the rest of the nation pays the bills.
the rental economy
One of the largest symptoms of this transition is the creation of a rental society. American's just don't buy things anymore; they rent them.
Even when people think they are buying something, they are usually just renting it from a lender like a bank. The bank owns your house until you pay it off. It is their money and their asset. People that buy a house, refinance every 5 years or purchase a larger house dont think much about the fact that their mortgage never goes away. These home "owners" are really renters -- renting from the bank.
The other big ticket item in people's lives are cars. Many luxury cars today cost as much as a home did a few decades ago. Most cars today are not purchased, they are leased. Cars have always been an expense not an investment but leases have changed cars from a purchase into a service.
buying your budget
Another aspect of these changes is that most people today have no idea what money they have or how to manage it. Instead, they buy their paycheck. If they have money in the bank, the feel ok spending it. If they have credit available, they spend it.
This weekend I saw a commercial for a credit card company. their new feature is that you can text them for an immediate reply of how much available credit is on your card. The mentality that thinks this is a beneficial feature is the problem.
Digital cash also means that many people have lost touch with what they are spending. Unless they spent time with personal finance software are often shocked with what they find. Even if you barely noticed them, all those Starbuck's latte's add up quickly.
the service economy
The cash economy bought things and owned them until they wore out. The service economy pays for use and never stops paying, ever. Think about all the monthly bills for services you have that your parents did not.
Car lease, cell phone, cable tv, internet access, video games, HBO, even coffee... These fees never end and they now represent a large portion of one's monthly income.
asset price inflation
When there is more money around, things cost more money. One consequence of easy and cheap borrowing is the inflation of costs. If it was hard to get a loan, houses would cost less. With easy lending, housing and cars cost more. (Cars today can cost more than a house did 25 years ago.)
This is especially obvious when looking at housing prices over the past 5 years and comparing them to prices over the previous 50 years. Easy money has create asset inflation all around us.
At the same time costs for big assets have gone up, our focus has changed towards attainable stuff we think of as assets. Replacing your $400 TV with a $2,000 HDTV is a normal occurrence now. Our culture seems obsessed with stuff and we increasingly spend our financial reserves on small items that provide status but dont last long; new sneakers, TVs, stereos, iPods, cell phones, etc.
debt
We have become so accustomed to debt that people hardly notice it anymore. Debt is big business and we are actively trying to export it.
A few years ago I hear a story that brought this point home for me. A Korean man committed suicide because of the shame of the credit card debt his family had accumulated. When you contemplate the thought that someone would rather die than face the shame of debt, you start to realize how much things have changed for us.
In bygone days, people took out a mortgage for a house and paid it off. These days people just took out larger mortgages to keep up their spending.
Credit cards hardly existed a few decades ago and now personal credit card debt has exploded. Many people finance their lives on revolving credit. They ALWAYS have a debt with credit cards.
Today's announcement by Wachovia is telling of the change in attitude towards debt. It would seem that banks are "shocked" that borrowers who could afford to pay their bills are walking away from their mortgages rather than suck it up. Choosing foreclosure is a clear sign of this transition. Our relationship to money, debt and bankruptcy continues to change.
One could say that individuals are starting to look at debt the same way businesses have for a long time. There is no shame for a business to try hard and then give up in bankruptcy; why should the same not be true for families? Even though credit card companies have tried hard to outlaw personal bankruptcy, this kind of attitude change is happening and it has huge impacts on lending and our financial systems. We are going to see this more and over the next few years.
closing
These financial change represents a fundamental shift in household economics and the way families handle money. What are the ramifications for retirement, social security and health care? What are the ramifications for our national economy and the fiscal health of our nation?
A cash economy wasnt perfect but people need some personal responsibility and fiscal education. Somewhere along the way we may have thrown the baby out with the bathwater.