Time magazine has a very interesting piece this week, written by Justin Fox. In it he wonders how life will be different after the current recession. He pins it down to five major areas.* Bear in mind, the article is written very much from an American viewpoint.
1. Frugality
This is an extremely fashionable topic at the moment. Some cultural observers even think Americans are due for a prolonged shift away from the consumption obsession of the post–World War II era. That strikes me as an iffy bet, but it is clear that the debt-fueled consumer spending binge of the past couple of decades is over. The household debt-to-income percentage more than doubled, from 65% in 1982 to 135% in 2007. That turned out to be way too much for us to handle, and now the leveraging process has gone into reverse. The latest household debt-load reading from the Federal Reserve is 128%, and while nobody knows exactly where the percentage will end up, a lot lower seems like a safe prediction. Which means that for years to come, American households will be spending less than they take in.
2. Bear Markets
The long boom in stock prices from 1982 to 2000 and the shorter one in housing prices from about 1997 to 2006 were fueled by rising debt. Ever easier mortgage terms and falling interest rates provided a brisk tailwind for home prices. In the stock market, higher profits pushed along by bigger consumer and corporate debt loads brought higher stock prices. Start ratcheting the indebtedness down and throw in slower growth, and both of these processes go backward. For the long-term health of the economy, that's good — as we've learned, debt-fueled growth is not indefinitely sustainable. It means, though, that both the stock market and the housing market will be confronting headwinds for years to come.
3. Volatility
The Great Moderation was a name economists gave to a post-1982 era marked by only two mild recessions and long stretches of uninterrupted growth. That's over, and the transition to whatever comes next will, if history is any guide, be messy. From 1970 to '82, the U.S. economy was hit by four downturns, two of which (1973-75 and 1981-82) until recently competed for the title of "worst since the Great Depression." The current recession has undisputed claim to that title. And while we may be about to climb out of it, don't be surprised if we endure more downturns. Think of a W shape — maybe multiple Ws — not a V.
4. High energy prices
Saying energy prices would stay high was one of the great forecasting errors of the late 1970s and early '80s — so it's a little scary to predict that they will stay high this time around. But the fact that even the slightest hint of a turnaround in the global economy has sent oil prices skyrocketing from $35 a barrel to more than $70 ought to be a sign that the upward price cycle that started a decade ago isn't played out yet. The crucial element may be that the struggling U.S. no longer drives the global demand cycle — China and India do.
5. Higher taxes
There's just no way to square the cost of current recession-fighting efforts, future Medicare commitments and the various goals of the Obama Administration with the current level of taxation. Taxes are going to have to go up, and raising rates on just the very richest won't be enough. The only alternative is what some call the inflation tax — reducing the relative size of the country's debts by letting prices rise across the board. But that has its costs too. The free-lunch era is over.
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