Last week, I wrote about a client who was a homeowner and always paid his bills, but because of the economic impacts of the recession, was facing two of life’s most stressful moments: a divorce and a foreclosure. He is facing the prospect of joining the segment that only transacts in cash, because his credit rating is facing ruin.
What does this mean to us as an economy and a society? Since World War II, we have become increasingly geared toward instant gratification. If we want something, we finance it. There has always been a segment of society that did that; that was the way they lived; I dubbed them Segment B. They always managed to survive, frequently because of the rising value of their homes. Now Segment B is shrinking, with more people moving into Segment C, a world built on cash.
From a societal standpoint, how are people going to manage the urge to get what they want, if they can’t get the credit to buy it? Are we going back to a cash society? Will people actually begin to save in order to acquire something?
From an economic standpoint, what’s going to happen to an economy built on consumer spending? If people can’t get credit, that affects commerce. The people in the business of supporting credit are now having trouble too. If people start paying cash, why do I need credit?
There are some pros and cons to this. Perhaps retailers will go back to offering credit, before the days that they passed off those notes to finance companies. They’ll offer credit to people they know best, so there will be an advantage to staying in one place and shopping in the same place. Consumers and retailers will get to know each other better.
At the same time, people may get more conscious about what they do with their finances. They may become more prudent in their spending choices. Cash will only go so far, so they’ll control their wants more. This may presage a return to the pre-World War II world.
There is talk about trying to keep the marginalized people in Segment B in it, as a way to preserve the status quo. There is talk about giving people like my client some forgiveness. Should we give a one-time pass to people who have had these kinds of issues, people were buffeted by life’s unfairness, both within their family and beyond?
I think that’s an unlikely turn of events. I see credit standards getting tougher, and most institutions becoming more risk-averse. More and more, financial software spits out automated results regarding risk with little input from human affairs or emotions. Regardless of how the foreclosure happened, people who experienced it will be judged as untrustworthy.
The result: Segment C will only grow, and a cash economy along with it. It means that we face a completely new economic world going forward, one whose ways may very well be foreign to most of us.
