June 10, 2009 Edition, Volume III

Inside Signature Update

• The High Cost of High Living
• A Change in Global Currency?

The High Cost of High Living

I recently had an opportunity to address a group of academics regarding urban trends in the US marketplace, including issues surrounding urban sprawl and the ‘New Urbanism’.  During the open question and answer period, an interesting claim was made by one of the participants - a claim which represented a point of view I’ve now heard several times in the last few months.  The question posed had to do with changes in the American standard of living and how, or if, we may ever return to the high standard of living experienced in the US through the 1950’s to the 1980’s.

What interested me most was the impression that our standard of living has declined over the last 20-30 years.  The participants reflected a perceived decrease in the American standard of living, presented concerns that the ‘good old days’ may never return, and expressed their frustration that we’ve entered into a prolonged period of generational standard of living decreases rather than the increases experienced by prior generations.  Nothing could be further from the truth.

Over the past decades, we’ve seen a standard of living increase in this country, and the world, of unprecedented proportions.  I grew up in the 1960’s and 1970’s in a family of five children, in a middle-class neighborhood in the San Francisco Bay Area.  Though ours may have been a lower-priced neighborhood than some in the area, it was a far cry from others we frequented. My father worked hard and earned a good salary; my mother was an at-home-Mom; we lived in a modest four bedroom home in the suburbs with a two-car garage, Dad had a small boat and Mom watched soap operas before finishing her housework for the day and making dinner.  Like most families, ours struggled at times; but we knew we were part of a great collective, and our family life was little different from most we knew.

My Mother made lunch for each of us before we went to school or work and could often be found sewing dresses for my sisters.  Dad did yard work with the boys, and as often as not worked a few hours on Saturday.  We had one television set, a couple of radios, enjoyed a few vacations to the beach, went camping now and then, and many Saturdays were spent at the movies.  Excepting a few idiosyncrasies we won’t discuss here, our family was very representative of a growing majority of middle-class families in our country.  Families of that era rarely ate out, didn’t spend hundreds (or perhaps thousands) each month on cell phones, internet, satellite and cable connections, and HELOC payments.  Households had few credit cards, saved a little each month and only refinanced their homes if absolutely necessary, as often as not to help pay for college or weddings.

The vast majority of families lived well on one income, and therein lies the basis for the concern many have recently expressed.  It has become increasingly difficult to support many families on two incomes, well enough one.  Retirement lifestyles are in jeopardy unless 401(k), IRA and pension savings are in the high six figures.  And consumer debt levels threaten family solvency as never before.  These are obvious issues in our society and economy.  Less obvious is that our expectations for convenience, comfort, entertainment, and recreation have soared!

Today’s households of most any type have microwave ovens, multiple television sets, several telephones and cell phones, two, three and four cars with garages to match, two or more computers, game consoles, and home theater systems, not to mention ATV’s, boats, timeshare units, and a host of other ‘necessary’ luxuries.  The average household eats together 2.1 times per week, and the average adult consumes 5.3 restaurant or fast food meals weekly.  Instead of very nice homes of 1,500 - 2,000 square feet with a two-car garage, we now require luxury homes of 2,500 – 4,000 or more, sporting a three-car garage and RV pad.

Lifestyle improvements of prior generations typically followed productivity increases in the marketplace, resulting in higher wages per worker.  The generational improvements, though meaningful, were modest by comparison to the increases of the last twenty plus years.  The expanded lifestyle expectations to which we cater today are funded from a combination of continued productivity gains, the insertion of additional household members in the workplace, and mountains of debt. 

Additionally, the costs imposed on society for our increased lifestyle demands are difficult to enumerate.  As we consider the cost of the added stresses on households and marriages; the costs associated with generations of latch-key children raised with less parental involvement, including adolescent crime, substance abuse, lower levels of educational achievement; and the impact of an overly entertained society at the expense of more healthy alternative activities, both physical and emotional, we begin to see the enormity of the problems our choices may be creating.

To the extent that we associate less beneficial utility with today’s standard of living, it is not because we have been forced to settle for less; rather, it is expressly due to the need to face the consequences of those choices we’ve made in pursuit of more, much more.  

Following the theme of an economic reset, we see that the average household has recently increased personal savings by more than 5% and has shifted to a more moderate consumption level.  Greater emphasis is being placed on prudence than opulence, and excess has become a ‘hiss and a byword’ rather than something to which one aspires.  This may be a temporary result of the recession and lower employment levels, or perhaps it is a return to the ‘good old days’ as many have longed for but with a very different focus than most might have expected.   

The American standard of living has gone from good to great to opulent, and while the pendulum is swinging back to correct for excessive levels of spending, our lifestyle continues to outpace the expectations of the economists and social scientists of decades past.  As the domestic savings rate has shifted back to the positive, a small but important part of the consumer’s dollar has migrated out of the retail economy and into banks and long-term investments, exactly where more of it has belonged.  Soon, as households have a more appropriate level of savings, they will begin to spend more freely, but in the meantime we’re living through an economic reset that includes making adjustments back to levels of consumption and expectations that most societies would still consider luxurious.

Will future generations expect to exceed the standard of living of those who came before?  Certainly, but perhaps a realization will creep in allowing for lifestyle improvements absent excessive consumption and debt.  We absolutely need to learn to be happier with that which is honestly and prudently ours rather than continually pining away for more at any cost.

A Change in Global Currency?

As the US dollar has given ground to other currencies and the US Treasury has taken to extraordinary levels of debt offerings, the discussion of currency domination has risen to new levels.  Media reports of Chinese, Russian, and various lesser sovereigns’ interest in a new global currency, one that would replace the US dollar, have risen to new levels.  As often is the case, the debate has become more of a media event than a functional issue on the international stage.

Though the US dollar’s decline, the national debt’s increase, and lower US GDP and employment figures are very real, the US economy remains the strongest and most resilient around the globe.  The call for a new international currency feeds directly into the imaginations of media outlets, conspiracy theorists, and ‘new world order’ protagonists, but falls short of a credible debate.  Even the BRIC nations (Brazil, Russia, India, and China), which economies have shown amazing growth, continue to deal with domestic difficulties rendering their abilities to host an international currency completely out of the question. 

Consider China, far and away the strongest competitor for a new international currency, a nation of extraordinary natural and cultural resources, yet burdened with a majority class existing well below their own country’s established poverty levels.  China’s middle and upper classes, estimated at over 450,000,000 now exceeds the entire US population (approximately 307,000,000) but their GDP, estimated at $3.5 trillion in 2008, pales by comparison to that of the US at $14.3 trillion.  Likewise, the Chinese poverty class of some 900,000,000 citizens has yet to benefit by China’s growth, and they’re beginning to demand a level of service and support that some suggest may stifle growth. 

The questions to be answered regarding the Chinese economy far outweigh the available answers.  Will the massive poverty class suffocate the efforts of the minority upper and middle classes, or will the lower poverty class join the middle and upper class?  Will the Chinese government put up with the middle class growing to a point that it could become the majority; and if so, will that middle class allow central planning to control their lives?  The list goes on.

The Chinese are not well known for relinquishing control, and the world has been amazed that they’ve come so far so fast.  Have they been able to avoid social unrest and conflict simply because the government still has a tight grip on the majority of the citizens?  Most Chinese nationals who’ve come to the US for education are not interested in returning to their homeland though they long for the cultural and familial system they left behind. 

Can China innovate itself to global dominance?  Not if central planning continues to run the show, and almost certainly not in our lifetimes.  Other nations calling for a change in the dominant currency are not only insignificant when compared to China, but offer no relevant options for world trade.  The EU is inconsequential and offers no threat – their economy is imploding as a byproduct of a birthrate that simply will not sustain the culture, and the rise of immigrants in those countries will ultimately have a destabilizing impact.  Great Britain appears to be the possible exception to this but has accepted its role as America’s older, though economically inferior, cousin.  Russia makes noise in the international arena; but in raw terms, they’re all bark and smelly breath.  Brazil could someday become a significant player; they’ve got the resources and population, and their societal and political reforms of the last thirty years are impressive, but they’ve simply been unable to avoid patterns of corruption that strangle their potential time and again.  

Nothing in the Middle East has the ability to rival the US or the BRIC economies; and as long as oil remains under $100 per barrel, the oil economies will rattle their sabers and repeatedly stab each other in the backs.  If in the next 30-50 years US technological innovation substantially reduces our dependence on foreign oil, the economic gap between these economies and those of greater international relevance will widen once again.  Consider the outcome as formerly dependent countries, including the US, tell the OPEC nations to ‘take a hike’ - the destabilizing affect may be impossible for them to overcome.  This possibility has not eluded various Middle Eastern governments, and as a result, the Middle East’s second most important export into Europe and the Americas has become their people.  I work closely with a variety of well respected professionals from Turkey, Iran, Iraq, India, and Pakistan, in addition to those from other Asian nations, and few of them intend to return to their home country.  It’s a telling commentary when a country’s own citizens, many of whom are engineers, economists, and environmental and bio-technologists are less interested in returning to their roots than they are in adopting western culture.

I’ll place my bet on the US and our currency.  That may be part optimism but it’s an equal measure of pragmatism and the one sure bet in the domestic and international markets.

[1] Signature Update is offered by [2] Richard Haskell, Managing Director of [3] Signature Wealth Management  and CEO of [4] Signature Management, LLC