|Dollar's fall forces new standard of frugality Americans forced to live WITHIN THEIR MEANS. LOLOL|
Sam Zuckerman, Chronicle Staff Writer
It's a global shift that some are calling the Great Reckoning.
For a generation, economists warned that Americans were living too large. With wallets crammed with credit cards and home equity loans available to any homeowner who could sign his or her name, consumers went on a debt-fueled buying binge. Living rooms bulged with the latest in snazzy electronics and garages filled with shiny new cars and trucks. Restaurants were fully booked, and airlines whisked happy passengers to dream vacations around the world.
Now, that shop-till-you-drop, I-want-it-all-and-I-want-it-now era may be coming to an end. It couldn't last because it was built on a mountain of money borrowed from overseas.
Year after year, the United States bought more from the rest of the world than it sold as foreign nations cranked out shipload after shipload of goods destined for American consumers. By 2006, the U.S. international deficit in trade and related payments exceeded $800 billion, about 7 percent of the entire economy.
It was only thanks to the kindness of strangers that such a drain of dollars was able to continue. Every year, overseas investors poured hundreds of billions of dollars into U.S. stocks, bonds, real estate and other assets, largely offsetting our taste for imported goods.
But the housing crash, a severe credit crunch and a dizzying fall of the dollar are depriving the nation of the means to keep on borrowing and spending. Foreigners have become wary of underwriting the U.S. standard of living. The flow of outside investment is slowing.
In effect, the United States has maxed out on its national credit card. Like it or not, that's one of the most important things now forcing a new standard of frugality on free-spending Americans.
"We're going back to the good old days of living within our means," said David Rosenberg, chief North American economist for securities giant Merrill Lynch.
Because household spending represents 70 percent of all economic activity in the United States, a prolonged consumer slump could weigh heavily on the nation, fostering recession or weak growth for some time to come.
A long boom
The years from the early 1980s until recently were a long boom for American consumers, even though their incomes grew slowly if at all during much of that period.
"There was a lot of air under this economic expansion," Rosenberg said. "It was engineered by an unprecedented increase in (borrowing) that involved practically every area of consumer credit."
Consumer debt reached levels never seen before and, by the end of 2007, the household savings rate fell below zero.
The United States is now in the early stages of a prolonged period of belt tightening, a contraction not seen in decades.
Consumer purchases of items other than food and gas have fallen this year, according to the Commerce Department. Sales of a broad range of products - including clothing, home furnishings and motor vehicles - were lower last month than they were in March 2007. The slump extends to services too, such as air travel, restaurants, hotels and casinos.
The International Monetary Fund forecasts that in 2008 and 2009, household consumption will decline further.
"We're seeing the birth pangs of a new economic structure," said Neal Soss, chief economist for the securities firm Credit Suisse First Boston. "The next year or two or three will be about the transition to a new equilibrium. Consumption by households will grow more slowly than their incomes, which is the exact opposite of the last 25 years when consumption grew faster than incomes."
Time to cut back
The adjustment is painful. Few people voluntarily cut back their standards of living. In most cases, families are doing so because their incomes aren't keeping up with soaring prices, especially for such necessities as food and fuel. Their homes and investments are falling in value and can't be tapped as readily for consumer purchases. With credit standards tightening, people can no longer borrow easily to make up the shortfall.
"Standards of consumption have to fall," said Stanford University economist Ronald McKinnon. "The burden really falls on households."
The changes in middle-class family budgets are likely to be significant but not necessarily devastating, economists say.
"This is not the end of the world. It's not Armageddon," Rosenberg said. "It doesn't mean we're going to have to live in a cave or a hut or an RV. The areas of retrenchment are in things we can do without, such as cutting out that extra vacation."
The current period marks the finale of the post-World War II era when the United States stood unchallenged atop the world's economic pyramid and the dollar reigned as the one truly global currency, many observers say. Now the nation must deal on more equal terms with a rising China and India, a united Europe and a powerful bloc of Asian manufacturing nations. Even Latin America, the long-time underperformer in the global economy, is flexing its muscles.
"The world has become multipolar," said UC Berkeley international economics expert Barry Eichengreen. "Our dominance will decline."
In places such as Asia, where Uncle Sam long wagged his finger at nations that mismanaged their economies, "there is a peculiar sense of satisfaction that the United States has received its comeuppance," Eichengreen said.
The catalyst for this transformation has been the traumatic collapse of the nation's housing market. The abrupt U-turn in home prices in the United States beginning a little more than a year ago set off a chain of events that dramatically altered the nation's position in the world economy, creating a set of circumstances that made a consumer retreat inevitable.