Charles Hugh Smith at the Of Two Minds blog delivers an unpleasant message in End of an Era: What Isn’t Coming Back. He says the financial crisis is the just beginning of some tough times caused by overspending instead of saving, at all levels. We can ignore his message, evaluate the message, or believe the message. Charles makes some important points here, so I don’t recommend that we ignore the message or kill the messager. Instead, let’s see if we can learn anything that is worthwhile.
Below he identifies six conditions which underpinned the bogus prosperity of the past decade have changed for good.
1. Permanent decline of the assets which supported rampant consumerism. Having gleefully swallowed the fiction that real estate could rise indefinitely, and thus fund not only a plump retirement but a never-ending consumer binge, the American middle-class is now coming to grips with the reality that real estate valuations were a bubble which has burst. The bust is taking down the primary asset of the Baby Boom generation (housing) and the equity-extraction-machine of home equity lines of credit (HELOC).
… the entire superficial surface of jewelry, lavish cruises, huge suburban homes, etc. was based not on a foundation of savings and productive real wealth but on astonishing increases in debt. It was never sustainable, and the fantasy that it was sustainable, and perhaps even “deserved,” was always visibly absurd.
But it’s not just housing which has plummeted; it’s all assets classes. And that decline hasn’t just shattered consumer borrowing, it’s also wiped out much of the retirement wealth of the Baby Boomers. (Physical gold has risen in value, but other commodities have seen boom-bust cycles of appalling volatility.)
2. With their assets diminished, Boomers must now save rather than spend. The decimation of Boomer assets and retirement funding is documented in this report sent to me by longtime correspondent J.F.B., who has been presciently pointing out the risks to the Boomer retirement for some time: [click to continue…]
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