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Spend more, save less, and you'll lose in the long run

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By ROBERT TRIGAUX

© St. Petersburg Times, published February 21, 2001


I've got all the money I'll ever need if I die by 4 o'clock this afternoon. -- Henny Youngman

When it comes to money, who are we?

A nation that's just enjoyed one of history's biggest run-ups in wealth, courtesy of the longest continuous economic expansion in U.S. history?

Or a country in which half of us admit, at one time or another, that we live from paycheck to paycheck?

Both, apparently.

A national consumer group Tuesday unveiled another sobering survey that shows the lack of savings by too many American households. The numbers would not be so painful if we had not just frolicked through an extraordinary decade of low unemployment, low inflation, unprecedented job opportunities and a stock market that rocked to unprecedented highs.

Forget the "digital divide." The "dough divide" seems to be broadening the span between the comfortably wealthy and (as the survey calls nearly half the population) the "strapped and struggling."

If folks (especially aging Baby Boomers) couldn't pad the nest egg in the 1990s, they never will.

And that's scary, given the sharply slowing U.S. economy and the vulnerability of workers in lower-paying jobs to get dumped first by cost-cutting companies.

How grave is the Consumer Federation of America survey of 1,637 "nationally representative" households? Consider:

The typical household has net assets of $71,700 -- mostly the equity in their homes. But the same household has net financial assets (cash, savings and investments, including retirement accounts) of a paltry $9,850. Low-to-moderate income households average net financial assets of less than $1,000.

Despite the boom times of the late '90s, low-to-moderate household wealth declined between 1995 and 1998. Net assets of very low-income households (those that make less than $10,000) fell from $4,992 to $3,950. Low-income households (making $10,000 to $25,000) sank from $31,940 to $24,650.

53 percent of those surveyed say they sometimes, most of the time or always "live from paycheck to paycheck."

The survey, funded by a Bank of America Foundation grant, focuses not surprisingly on the need for more households to adopt a plan for savings. What a concept!

But the survey results do not linger on the more insidious pressures on the average American's wallet in the 1990s: easy credit and luxury fever.

Credit card companies blazed frontiers in the '90s by finding new ways to shove more unwanted credit cards into the hands of already over-leveraged consumers. The result: larger household debt loads at high interest rates.

Far, far worse was the '90s marketing blitz by financial companies to persuade U.S. homeowners to take out a home equity line of credit (on top of their first mortgage). The federal government blessed this run-up in new debt by allowing borrowers to deduct large portions of their home equity credit on their tax returns.

While home equity credit helped fuel a consumer consumption boom, the longer-term effect was to sap the build-up in savings in U.S. homes. (See chart.)

Between 1989 and 1999, the home equity of the average homeowner fell from $91,000 to $89,500.

That decline may seem small. In truth, it's an extraordinary loss of savings. Most U.S. homes appreciated sharply in the 1990s. That means a homeowner's equity in his home would have increased accordingly, but heavy home equity borrowing erased most of the savings.

Armed with such a mother load of spendable credit, U.S. homeowners went shopping. Big time.

Basic expectations were fueled largely by the explosion of new wealth created by (what was then) a thriving New Economy of dot-coms and the accompanying expansion of high-end consumer goods aimed at the new megabucks crowd.

Many Americans who could not afford such expensive goodies bought them anyway.

Cornell University economist Robert Frank recognized the zero-sum disease based on this gotta-have-the-latest-glitziest product. He wrote a book about it called Luxury Fever.

"The U.S. built more bombs. The Soviet Union built more bombs," Frank once explained. "We weren't any more secure than before, but it was very important nonetheless that you not have fewer bombs than your rival.

"Well," he said, "it's the same with much of this spending."

We're no longer talking about the Average Joe keeping up with the Joneses.

Now we're talking about trying to keep up with Bill Gates. Donald Trump. Warren Buffett.

Can't do it. But we sure can borrow and spend a lot in the attempt.

What's this all got to do with another survey telling us that most Americans have built up so little wealth?

Everything.

- Contact Robert Trigaux at trigaux@sptimes.com or (727) 893-8405.

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