Things do change

There is a saying that generals always prepare for the war they just fought instead of the one that is going to happen. Of course, this is true in many areas, not the least of which is economic forecasting.

It is tempting and certainly sometimes useful to look at what has happened in the past and assume it will happen again. In situations where there have been no fundamental changes, this is definitely a valid approach. Many economists, or pseudo-economists, are of the opinion that nothing really changes and therefore the past is a sure precursor of the future.

But things do change and what needs to be determined is if we have seen a fundamental shift in behavior in the US consumer.

I think we have to some extent and perhaps it is more accurate to say we are seeing abnormal behavior the arose in the generation that grew up after the prewar economic problems, revert to a more normal approach. As a member of that generation, we grew up in an extremely optimistic period and pretty much ignored the warnings of the earlier generation. Certainly bigger was better, the stock market would always go up, real estate would always appreciate, each generation would do better than the previous one, America was a land of opportunity.

However, the last ten years or so have put each of those assumptions into doubt and we see the baby boomers reassessing things. Many find themselves in situations they never expected. Recently a good friend of mine complained that she never expected to have so much financial doubt at this point in her life. She is not alone. For many Americans, the one asset they really expected to sustain them was their home. However, over expansion and easy credit led to a glut that led to prices collapsing and home devaluations. It will take years for this excess inventory to be absorbed. This in turn led to a financial crisis, a severe recession and a realization that economic prospects for the next generation may not be so rosy.

The change in behavior may only be temporary or maybe, and this is more likely, be part of a cycle where the current generation will see wealth preservation as something you have to work at. Only time will tell.