Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

[EJ]

Ghost of Joseph Schumpeter and the end of the Monthly Payment Consumer, again

More than 25 years of successful credit bubble re-inflations have trained us to think of consumer retrenchment as temporary. This time it is not. Invest accordingly.

The monthly payment consumer (MPC) first appeared in the late 1920s with the advent of installment credit that temporarily extended the purchasing power of the American middle class enough to make exciting consumer products affordable, products that entrepreneurs unleashed in a wave as they beat government financed WWI military technology swords into consumer products plowshares--radios, refrigerators, and automobiles. By 1929, personal consumption expenditures (PCE) grew to 75% of US GDP and briefly spiked to 83% in 1932 as GDP collapsed faster than PCE during The Great Depression. PCE fell rapidly to 49% percent of GDP in 1944 and never again reached the 1929 pre-crash level, but peaked at 71% in 2008, the same year household debt service payments as a percent of disposable personal income peaked at 14.3%.

Joseph A. Schumpeter said of the consumer crisis in his 1939 book Business Cycles: “Consumers' borrowing is one of the most conspicuous danger points in the secondary phenomena of prosperity, and consumers' debts are among the most conspicuous weak spots in recession and depression... the load of debt thus light heartedly incurred by people who foresaw nothing but booms should become a serious matter whenever incomes fell. Nothing is so likely to produce cumulative depressive processes as such commitments of a vast number of households to an overhead financed to a great extent by commercial banks.”

The credit bubble that started in the early days of the FIRE Economy in the early 1980s collapsed with the housing bubble starting in 2006. Debt deflation and global depression will put an end to the MPC over the coming years in a rhyme of events that Schumpeter explained 70 years ago.

Personal consumption expenditures decline for the first time in over 70 years


Household debt levels fall for the first time since The Great Depression

The collapse of the FIRE Economy is revealed in the March 2009 Fed Flow of Funds report Z.1 table d.2 for anyone to see.

Since it started in the early 1980s, every time the FIRE Economy ran into trouble (1987 post stock market crash, 1989 post LBO bubble collapse, and 2000 post tech stock collapse) it was bailed out by central banks either directly or indirectly. In 1991, debt levels declined in every category except financial, which virtually doubled, accounting for the growth shown. After the tech stock bubble collapse, foreign central bank borrowing restarted the FIRE Economy. But in 2008, all avenues failed. Non-financial, finaicial sector, and even local and state government debt growth declined, all except for Federal government debt. (See: Flow of Funds Q4 2008: Debt Deflation confirmation - Eric Janszen)

Wrong lesson

The Federal Reserve mistakenly believes that the lesson of 1930s was to re-inflate a credit bubble quickly before its collapse becomes self-reinforcing, when in fact the lesson lost was to not allow a credit bubble to form in the first place; collapse is inevitable and cannot be stopped but the debt excess canceled either by monetary deflation or inflation, and the Fed is committed to the latter path.

End of the second credit and consumption-based US economy in 70 years, forecast in red

The economic crisis will again turn a generation of Americans into savers and critical consumers that look at total prices of goods, not monthly payments, and avoid debt. The era of mass marketing of consumer credit and riding the wave of debt-financed consumerism of the past 25 years is over. Only those companies that prepare for this sea change in consumer attitudes will survive.

See also:
Can Anything Bring Down the Monthly Payment Consumer? - Jane Burns Aug. 2007 (free)
Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen - Mar. 2009 (free)
Venture Capital in a Transformational Depression - Janszen - Mar. 2009 ($ubscription)

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[cbr]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

what do you think will happen as far as trends with the consumer credit/debt collections business? will FICO scores survive or be relevant other than for a house? I presume autos may still be financed but on a much more rational basis... how long do you see the tail on debt collection business lasting?

i have been toying with starting up a consumer attack business, empowering consumers abused by credit and service companies to achieve real results and/or winning legal claims, but it seems that it may be a bit late...

[icm63]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen


Back to the finance world of the 1950s.

30% deposit minium for house buying

Coy that sell stuff by 'but now' interest free for 18 months, no money down, will see there business adjusted: cars, furniture, appliances
(of course it already happened).

The same stuff will be sold, but how its sold changes.

BEST INVESTMENT ADVICE: Find a COY that has a great market leader product, but sells on hoc ( ie debt), when that collapses BUY the COY. The product will survive under better balance sheet conditions.

[ricket]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

what do you think will happen as far as trends with the consumer credit/debt collections business? will FICO scores survive or be relevant other than for a house? I presume autos may still be financed but on a much more rational basis... how long do you see the tail on debt collection business lasting?

i have been toying with starting up a consumer attack business, empowering consumers abused by credit and service companies to achieve real results and/or winning legal claims, but it seems that it may be a bit late...

I, personally, have successfully emerged from the "Monthly Payment Consumer" mentality. I no longer look at how much I can afford monthly, but how much it will cost me, both in a literal sense, and a long term cost of use. For example, my vehicle is approaching 10 years of age and I am deciding if I should make any repairs or buy a newer, more fuel efficient, vehicle to save money. I have spent hours calculating how much I drive, how much I want to save towards buying, how much repairs will cost me, etc. But not once have I ever even *thought* about financing a new vehicle. No way, because I understand how the banks create that "financing" out of thin air and charge me money to which I have to pay extra for and which I feel like they do not deserve.

Also, EJ, I was re-reading your updated post that you cited above from March. You noted that Infrastructure Bonds should be issued and purchased. How come so many people discredit *housing* as viable infrastructure? Just because housing has become "financialized" does not make it any less of an infrastructure improvement. Think of all the infrastructure that had to be built to put all those homes in place (ie roads, electrical wiring, broadband communication lines, water, sewage, etc). One cannot discount how, if effectively utilized, that could greatly improve the prosperity of this nation. I think alot of people are greedy and they dont even realize it. Why not just literally give/force the banks that have received taxpayer bailout money to give up homes to those that need them? There's no reason why Tent Cities should be popping up in various cities, while there sits literally millions of homes vacant with no one living in them. Some of the McMansions you could put 2-4 families in!

I think a potential business model is realizing that we had this huge boom in real estate (which can be classified as an infrastructure improvement, similar to rail/mass transit), where we can literally put millions of homeless people off the streets and/or house most of the population in the US. Now find a way to connect all those homes together in such as way that eliminates the spatial boundries that typically define a "city". From there you can begin to build a productive model for an economy that is more local, more productive, and is sustainable over the long term. Wishful thinking on my part...perhaps. But grand ideas are never borne out of pessimism simply because pessimism is, as a whole, negative and self-serving at the expense of takings risks that may one day pay off exponentially.

[wayiwalk]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

"The economic crisis will again turn a generation of Americans into savers and critical consumers that look at total prices of goods, not monthly payments, and avoid debt. The era of mass marketing of consumer credit and riding the wave of debt-financed consumerism of the past 25 years is over. Only those companies that prepare for this sea change in consumer attitudes will survive."


I think the most interesting change not mentioned will be consumers will be looking for products with a useful lifespan that is greater than 1 or 2 years.

Anyone have a plastic zipper on a $100 coat break lately?:mad:

[ricket]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

Anyone have a plastic zipper on a $100 coat break lately?:mad:

Actually, if you look real careful, you should see how the zipper is either hot-glued or sewn to the edge of the fabric/coat. You can go to a local fabric store and find you a seam ripper and a replacement zipper. Find a grandmother who has a sewing machine and wah-lah.

The crafty people will be the prosperous ones in the upcoming depression. Better put your thinking hat on!

[goadam1]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

Don't count out new and improved forms of credit. What about the rental or subscription forms of indentured purchasing? Do you "own" a cell phone? I paid $300 for a phone and $120 a month add infinitum to use it. Or "subscription" forms of entertainment. You get the beatles for a dollar a month, forever. I bet some other models can be invented.

[don]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

Don't count out new and improved forms of credit. What about the rental or subscription forms of indentured purchasing? Do you "own" a cell phone? I paid $300 for a phone and $120 a month add infinitum to use it. Or "subscription" forms of entertainment. You get the beatles for a dollar a month, forever. I bet some other models can be invented.

Good points

Of course credit will become curtailed as the ability to pay dramatically shrinks but to call an end to the MPC means eliminating a favorite FIRE hor'derve and forfeiting the powerful political lever of capping wages and salaries with a debt escape hatch. Shifting the rising cost of labor onto money-making debt access for labor is what a lot of the last 30 years has been all about, at least at this level of examination.

We'll see a virtuous circle of public funding of the MPC before we see its demise.

[ax]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

Amazing how even now in every interview with Obama or his minions all they mention is "we need to get credit flowing again," i.e., the consumers spending again. If Florida is the Ponzi state, America is the Ponzi economy.

[goadam1]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

It's like the economy has a bad prostate.

[Spartacus]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

Amazing how even now in every interview with Obama or his minions all they mention is "we need to get credit flowing again," i.e., the consumers spending again. If Florida is the Ponzi state, America is the Ponzi economy.

the wasp has injected the toxin into the brain
and now the economy & government are being
led around by the stumps of their antennae

http://itulip.com/forums/showthread....wasp#post77708

[ricket]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

the wasp has injected the toxin into the brain and now the economy & government are being led around by the stumps of their antennae

What an incredible analogy LOL.

[ssvasulu]

What is the net effect any way? Inflation or Deflation.

Monetary inflation coupled with risk & debt averse consumers. Don't you think it is godsend event for govt? Govt can just keep spending money on all trash programs without causing inflation (because consumers use it either to pay off debt or to increase savings balances). When will the monetary inflation start to have impact?

[bpwoods]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

Picked this up to-day in the library.

'...(it) is like a sausage machine; it grinds all the brains together in one mash; and that's why we see nothing but porridge-heads and pulp-heads all around'.
H. Ibsen.

Recognize anyone we know?

[rchdenton]

Re: Ghost of Joseph Schumpeter and the second end of the Monthly Payment Consumer - Eric Janszen

I, personally, have successfully emerged from the "Monthly Payment Consumer" mentality. I no longer look at how much I can afford monthly, but how much it will cost me, both in a literal sense, and a long term cost of use. For example, my vehicle is approaching 10 years of age and I am deciding if I should make any repairs or buy a newer, more fuel efficient, vehicle to save money. I have spent hours calculating how much I drive, how much I want to save towards buying, how much repairs will cost me, etc. But not once have I ever even *thought* about financing a new vehicle. No way, because I understand how the banks create that "financing" out of thin air and charge me money to which I have to pay extra for and which I feel like they do not deserve.

10 years old! But how many miles and is it Japanese? By a Toyota, they don't go wrong and are good for 20 years and 200,000 miles. You could get embarrassed if you don't drive many miles a year though...