A Lesson Learned
The race that stops a nation has been run and won. And when the hype of the US Federal election subsides, the focus of many Australians will return to their personal financial position.
In many cases they won’t like what they see. With the economy slowing, unemployment rising and a lot of personal debt in the system, many are right to be worried.
Simply put, Australians (like many other nations) have been living beyond their means for too long. Consumer credit has replaced thrift and saving as a means of getting what you want.
Consider for a moment how expectations have changed in a relatively brief time frame.
It is no longer good enough to furnish your home with modest furniture. One now needs plasma televisions, an espresso machine and a giant stainless steel fridge all purchased ‘interest free’ with ‘nothing more to pay until 2009’.
Why shouldn’t we all have new cars if it’s only a few hundred dollars per month in payments? In fact, why stop there?
How about an overseas holiday and a jet ski? Well, if you haven’t got the cash right now just whip out your brand new gold card. Surely the bank wouldn’t have sent it to you if you couldn’t afford it – would they?
Of course we are given credit cards to make life easier. And there is nothing easier than instant gratification by putting it on your plastic. Already maxed out? Well that’s no problem – just increase your credit limit.
The bad news is that it is a problem. Eventually every debt has to be either paid or defaulted on. This is true for businesses, governments and individuals.
And debt is the biggest problem confronting Australians today and that is why the Reserve Bank is desperately trying to prime the economy through unprecedented interest rate cuts.
They know that a serious economic slowdown will exert deflationary pressure on the economy and that means many borrowers will be ruined. However, by priming the pumps too much, there is a risk of inflation getting out of control with all the pitfalls that entails.
But none of this is new. The lessons of poor savings and high debt levels have been learned the hard way by generations of Australians.
The lessons that will be learned by generations X and Y during this slowdown will impact on their future decision-making for the rest of their lives.
At least I hope it will.