Cover Story

Is there no tomorrow?

Americans are enjoying the fruit of a soaring stock market and rising incomes as they go on one of history's biggest consumption binges. But a personal savings rate stuck for months in negative territory is giving new meaning to the old phrase "spending like there's no tomorrow"

Issue: "Is there no tomorrow?," Aug. 7, 1999

Business is good at Klein Jewelers in downtown Portland, Ore., where Kathie Hellwege has noticed that customers are buying gold jewelry "for more occasions, just little things. A lot of ladies are buying little things for themselves. Guys will buy things for themselves." But it's not just the little luxury items that are attracting Americans' dollars. In Chicago, Troy and Sumaya Hoggard are building their own luxury home in a trendy neighborhood on what they admit is a "spur-of-the-moment decision." But there's one problem: "The market is so tight that any builder you talk to has so much work to do, so many projects, that they don't have time to do what we want done." The story is the same for luxury goods across the board: Luxury car sales jumped 7 percent during the first quarter of this year, while sales of personal and corporate jets reached a 15-year high. As with every period of prosperity in American history, consumers are on a spending roll, but this time with a new twist: They're spending completely at the expense of saving. Unlike the wise ant of Proverbs 6, who "stores its provisions in summer and gathers its food at harvest," Americans in 1999 seem to think harvest season is forever. The numbers are startling: The U.S. personal savings rate dropped into negative territory late last year and this past spring reached new record lows-minus 1 percent in March and April, and minus 1.2 percent in May. In other words, the average American each month is dipping into savings or going into debt in order to spend more than he earns. This is happening at the same time that incomes are rising; spending is simply rising faster. According to Consumer Reports, Americans are carrying debt at levels equal to 99 percent of their annual disposable incomes: That's almost twice the level of 40 years ago. These large debt loads, coupled with loose bankruptcy laws, led to a record 1.4 million individuals filing for personal bankruptcy last year, despite a highly prosperous economy. Any way you look at the data, Americans are on a spending binge, and a booming stock market is providing the fuel. With their 401K plans and stock portfolios soaring, many Americans don't feel the need to save money out of their take-home pay. This might be OK; a lot of smart people say the United States has entered a new era in which sky-high stock prices are justified by new technologies that have made companies more valuable. And, historically, the stock market has been the best place to invest money over the long term. But a lot of other smart people are starting to use the word bubble in reference to today's stock market. Bubbles, of course, have a tendency to burst, and history suggests that seven fat years will be followed by at least one thin year. Even if a sudden drop doesn't occur, some economists believe that retiring Baby Boomers in coming decades will exert downward pressure on stock prices, with aging Boomers selling stocks instead of buying them. If the pessimists are correct, Americans clearly will not be prepared. But some are acting foolishly even if the optimists are right. Larry Novick, a financial planner in Holliston, Mass., told WORLD about one couple he advised who earned about $122,000 per year, but saved virtually nothing because their pension funds were doing well. After incurring debt, they decided to cash in the husband's 401K plan worth $116,000, which created over $50,000 in tax penalties. "When April 15 arrives, they're going to be on Prozac," Mr. Novick said. "They'll have to go to the wife's 401K to pay the taxes, creating another taxable event." This unwillingness to save is a sharp break with the past. From the beginning, Americans have usually engaged in at least a modicum of saving. The Puritans, for instance, brought a well thought-out (though much misunderstood by moderns) philosophy toward money with them to North America. Concerned about the temptations of wealth, they "sensed a need to be moderate in their self-gratification," writes Leland Ryken in Worldly Saints. "While they were not ascetics, they recognized a need for curbs against greed and luxury." Such self-imposed saving, over the long term, also made them better equipped to provide for their families, the church, and the poor. Deliberate underconsumption built wealth, and the Puritan ethic (and, later, its secularized post-Puritan cousin) had the unintended effect of making the northern United States an industrial powerhouse. Unsurprisingly, researchers are finding that the nature of the world hasn't changed: Living below one's means still leads to wealth accumulation. For their best-selling book The Millionaire Next Door, economists Thomas J. Stanley and William D. Danko studied spending and saving habits of wealthy Americans. They didn't find profligacy; instead they found people who are efficient with their time and money, who "believe that financial independence is more important than displaying high social status," and who "live well below their means." They found, in short, the Puritan ethic without the religion. But a focus on the long term and a willingness to defer gratification are distinctly out of fashion today. "I don't want to sound like a snob, but once you've had a Prada bag, I don't know why you would carry anything else," said Kim Turner, a publicist from Atlanta, articulating the spirit of the age. "I'm not going to buy a $25 watch from Target that's going to break on me when I can have a $1,000 Gucci watch I know will last me forever." Of course, Americans have had other periods of high spending, but this one is unique in the extent to which it's occurring at the expense of personal saving. In the mid-1980s, at the height of the supposed "decade of greed" and "conspicuous consumption," annual savings rates stayed over 6 percent. In the early-to-mid-1960s, when the economy was in a sustained boom, the savings rate was over 7 percent. This year, on the other hand, is shaping up to have the first annual negative savings rate since the Great Depression. What changed? Along with the stock market, taxes. The federal take is near record levels for peacetime and the structure of the tax code penalizes some forms of saving by, among other things, taxing interest. Republicans on Capitol Hill last month proposed a $792 billion tax cut over 10 years, which included a provision to eliminate taxes on interest for many savers. But Kay Shirley, author and financial planner in Atlanta, sees a change in attitudes toward money as well, as she traces the current spending splurge back to the raging inflation of the 1970s. She points out that people now in their mid-40s (who, entering their peak earning years, are driving the new consumption binge) bought their first big-ticket items in the late 1970s. It made a certain perverse financial sense to spend when inflation was so high, because saved money lost value over time. In the low-inflation 1990s, "that philosophy no longer makes sense," Ms. Shirley told WORLD, "but they were trained in a habit that is very difficult for them to break." Some families have already begun to pay a heavy price for these habits. A Census Bureau study released last month found that almost 3 million Americans in families with incomes above $68,700 (putting them in the wealthiest fifth of the nation) had trouble paying for such basic needs as mortgages, food, and utilities at least once in 1995. "They haven't been taught how to handle their finances," said consumer credit counselor Joanne Kerstetter. "When any type of crisis hits, they don't have savings to fall back on." But most Americans aren't yet ready for any ant-type thinking. "Why shouldn't I treat myself to the best there is?" asked a cocktail waitress shopping at a gourmet grocery store in Atlanta. "The food is fresher here. I'm single, and I'm spending money on myself. I work long hours and I think I deserve it."

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