Credit-fueled consumerism is the grease that oils the U.S. economy. The economist Thorstein Veblen popularized the notion of conspicuous consumption, which explains why people covet luxury items and the latest fads, despite having to stretch their budgets for more fundamental items like food, shelter and water. Mercifully, violent scenes of hordes of bargain-hungry shoppers seem to be diminishing as traditional retail consumption shifts to decidedly easier and more cost-effective online options. The entire consumer frenzy of Black Friday, Small Business Saturday, Cyber Monday and every other clearance sale thereafter, misses one key issue, which is that 40% of the U.S. population cannot afford a $400 emergency expense.
Meanwhile, U.S. credit card debt is at an all time high of $1 trillion, not to mention other forms of purchase-driven debt, such as student loans, auto loans and personal loans, among others. Adding in these categories, U.S. credit debt is set to swell to $4 trillion by the end of 2018. The insidious aspect of conspicuous consumption is that people are often opting to buy (or rather finance through credit) expensive goods, while a plethora of more affordable substitutes exist, if not foregoing the purchase outright. As a result, it is not uncommon to see people sporting the latest iPhone, now financed through mobile phone providers, while living in their parent’s basement or driving a Tesla for Uber to make enough money side hustling to cover lease payments. While there is nothing demeaning about side hustling, indeed, it is increasingly one of the only ways urban dwellers can get along in costly cities where qualifications alone are often insufficient to cover high living costs. The challenge arises as the U.S. faces more and more community or city-level emergencies where the strain on personal and business finances are laid bare.
Long term, there is no cavalry coming to rescue you. This is an increasingly harsh reality evident in communities across the U.S., from Puerto Rico and the U.S. Virgin Islands, to Houston and Paradise, California, among countless other communities stricken by large-scale crises. The fact that economic recovery depends very much on how individual households spring back proves that resilience is not an abstraction, but rather a financial formula. It bears repeating, that 40% of the U.S. cannot withstand a $400 setback. Against this backdrop, credit-fueled consumption is not only dangerous, it is increasingly tantamount to digging out of a financial hole while digging out of a literal one. Putting wants in check and supplanting them with needs is difficult, especially as many try to keep up with the Joneses next door. In an ordered evacuation, however, like the one issued for nearly the entire state of Florida ahead of Hurricane Irma’s landfall, will you or the Joneses be able to take heed of these potentially lifesaving warnings?
Following a man-made or natural disaster, which are increasing exponentially in the U.S. and are politically but not economically colorblind, the strain on personal and business finances grows quickly. Traditional rainy day funds set aside to cover medical emergencies, periods of joblessness and other setbacks are designed to cover monthly household expenses during times of distress. Typically, financial advisors call for 6 to 9 months of monthly expenses on hand in order to cover family overhead. The same concept would hold true for businesses to cover overhead, payroll and other fixed costs during periods of distress. Following a disaster, however, like Hurricane Harvey, which turned Houston into a swamp or Hurricane Maria, which turned Puerto Rico’s clock back to the pre-industrial era, a 6 to 9 month rainy day fund can be exhausted in half the time. The reason, simply, is that the entire city or community is in distress or physically displaced. Once acute emergency response efforts end and as the slow roll of insurance and other reconstruction money is brought to bear, it can take many months and even years for a disaster-stricken community to regain its footing.
Insidiously, the disaster-displaced not only have to contend with the immediate costs of displacement, such as staying in a hotel, travel costs, food and medical care, among others, they are still liable for all their debts and obligations back home. In some occasions, although there is no hard and fast rule, banks, particularly for mortgages or business loans, may offer a moratorium or temporary pause on payments in severe situations. However, it would be unwise to count on this largesse, especially over a protracted recovery period wherein insurers will be sifting through the wreckage trying to determine whether they are on the hook or not. Herein lies the vicious cycle faced by the poorest victims of crises (roughly 40% of the country), especially the spendthrift for whom credit is likened to an entitlement and the latest gewgaw, fad or curio is a must-have. Already at the knife-edge of personal default or ruined credit, a disaster is often all it takes to tip people over the financial precipice. So, as U.S. consumers stand to shift $7.8 billion in a record-breaking Cyber Monday, on top of the $6.2 billion spent on Black Friday, perhaps some spending restraint is in order for a day of national resilience.