Wednesday, May 2, 2007

The "60 E-Z Payments" Hint

Back from my May Day "strike" (and, hopefully, my writer's block) and there were several suggestions to my request for topics to discuss - I will take them up tomorrow. Today, I will deal with a subject that has been nagging at me for several weeks, after I visited a housewares store and to my amazement noticed that it had put items as cheap as $15-30 on the E-Z-Payment Plan: a buyer can make 60 monthly payments for such things as curling irons, no-stick pans, and ironing boards - at an added interest cost, of course. Imagine that! The payment obligation, low as it may be, is almost certain to outlast the useful life of the item. Not only that, but the way they do it is they charge the payments to a credit card every month. Unless the buyer pays the card bill in full every month, he/she incurs and compounds double interest charges. The cheap-o item will end up costing a bundle after 5 years. That's what I call maximum effect consumer finance...

After being shocked at the venal banality of merchants and banks (in for a pound, in for a penny...) my mind leapt to the those weird tangents it usually does and so I eventually came up with today's posting. Here's the conclusion, right up front:

We are going through the very zenith of free-market capitalism - what will follow won't be pretty unless we do something right quick.

The free-market system is based on ever growing consumption regulated by the triangular relationship between Supply-Demand-Price: we may fix up to two of those variables, but never all three. So, what happens if the supply of essential goods goes into permanent decline? I define permanent decline as the condition where no matter how much you pay for a good, its total supply never increases but keeps inexorably decreasing with time. One common example is Peak Oil, but we may also think of food, metals, clean air and water, habitable land with temperate climatic conditions, etc.

It is obvious, to me at least, that orthodox free-market economics would go completely out of the window, since higher price signals simply won't create more supply. Out will also go fiat currency monetary policy, the basics of debt finance, pension accounting and a host of other modern-era economic principles we currently take for granted. Without preventive, enlightened intervention we may end up with a stagnant, command socio-economic system, something I call "medieval economics".

Naturally, I am not the only one thinking along those lines. Dozens of economists and thinkers have previously grappled with this idea (e.g. "The Limits to Growth", from the Club of Rome in 1972). You may also know that, as recently as the late 19th-early 20th centuries, the correlation between "growth" and "stability" was inverted, as could be seen in the relationship between stocks (growth) and bonds (stability). Price/earnings ratios were then extremely low (5-6x), whilst interest rates were tiny: stability and certainty of income were prized above all - not because people were "risk averse", but simply because there was little "growth" to be had by investing in company shares.

You may ask, "what does 60 E-Z payments for frying pans have to do with permanent supply declines?" As I said, my mind goes on tangents so I will try to explain my mental leapfrogs... If it takes a 60-month double loan for people to buy a cheap $20 item, then cash on hand is in short supply. Unencumbered cash (i.e. not from borrowing) is an excellent measurement of how much can be consumed right here, right now. Therefore, the current Price/Supply relationship for goods is such that Demand can only be covered by borrowing at ridiculous 60- month terms. And if that holds for frying pans, it also points to supply problems for more day-to-day, essential goods.

What can replace our free-market economics, if not a medieval throw-back? If we are smart, we should be thinking of regulated consumption and social cohesion, the very antithesis of the unrestrained free-market individualism that is in apotheosis right now.

After all, those $20 frying pans are made possible to us (even if with 60 payments) because the other 2/3's of the people on this planet can't yet buy them at all, but are willing to make them at a meager wage for export AND to provide the financing from their savings. What happens when this willingness goes the other way?

I see those 60 payments as a hint that the direction is starting to change and that we should be looking for a new socio-economic and political model. Does anyone else see it that way? When I asked the cashier at the store what she thought about this new 5-year financing for cheap merchandise, she shrugged and said: "It's a good thing, because people don't have much money these days". I doubt she thought through what she said...


  1. Brilliant post. Our American consumer driven society has hit a new extreme. I think this begs the question, is this the apex? Is it down from here? The ability and ingenuity to create new debt instruments, basically to create new infrastructure to prop up the consumer (credit cards, payday loans, easy mortgage loans, and so on) is astounding. It is like the agricultural 'green revolution' where massive inputs of energy and chemicals allows us to extract more and more productivity from farmland. All the while the soil of our breadbasket piles up at the end of the Mississippi delta. How long can it go on? I am done predicting. I have been astounded so many times I don't dare guess anymore. I just keep underestimating the amount of brainpower and energy that goes in to financial engineering ( and agriculture) But I do know that the longer it stretches on, the worse it will have to snap back.
    Jason B

  2. I second the plaudit from the first poster, but you lost me here,

    "Therefore, the current Price/Supply relationship for goods is such that Demand can only be covered by borrowing at ridiculous 60- month terms. And if that holds for frying pans, it also points to supply problems for more day-to-day, essential goods."

    Could you clarify the last sentence. Supply problems for more essential goods, how does that follow from what you've described? Forgive me if I am being dense.

  3. Is it the apex? From a long-term perspective measured in years or 2-3 decades, yes I think it is. Your analogy to unsustainable farming is extremely apt: we are borrowing prosperity from the future to consume it today. Brain power has nothing to do with it - it's pure greed, combined with indifference and ignorance from the great mass of the people.

    How do you wake the people up? Logic cannot do it; when addressing the masses one has to use pure emotion. How about this: "Stop consuming NOW because your children will die of starvation and infectious disease in 20 years". Alarmist? Irresponsible? You bet... But how do you fight against the even more irresponsible system that "urge(s) everyone to go shopping more"(GWB)?

    ross: He, he... yes it is convoluted. When I was writing the first draft I had inserted an explanatory part, but I took it out. I should't have...

    OK, here's what I mean: prices for goods are so high in relation to how much cash people have on hand, that the only way to afford them is to borrow at ridiculous terms. And if they are reduced to doing so for such cheap items, they must also have difficulty with all items (housing, energy, etc).

    There are many "hints" that this is so: the negative saving rate, the record-high debt/GDP and debt/personal income, the huge requirement for added debt for each added unit of GDP and other metrics I have written about in previous posts.


  4. I guess it all comes down to what type of socio-economic and political model you have in mind.

    In my own opinion, many of the problems we face are in part the result of excessive government and corporate intervention, manipulation and regulation of our lives. Therefore, I distrust any top down solution predicated on the notion that some "in-crowd" knows better and will decide the rules for the rest of us, e.g. cultural revolution.

    Basically we are conditioned from an early age, primarily through commmercials and other means of indoctrination, that material consumption and aspirations are the ultimate good. The problem is that material aspirations can never be fully satisfied and, in fact, only induce further craving. It is an endless cycle of wanting, getting then wanting again.

    As long as we as individuals don't recognize the futility of the endless craving and wanting of material goods, there really is no long term political solution that will not ultimately result in war, environmental destruction and human misery.

    In light of the fact that there is little correlation between the wealth of a society and the happiness of its citizenry, as attested to by the widespread depression, drug use and violence in the US, a more efficient or productive economy is not really the answer.

    Ultimately, we as a society and as individuals suffer from a spiritual disease that is only made worse by our heedless pursuit of material wealth. Since suffering is the touchstone for all spiritual growth, I guess we will just have to suffer some more before, hopefully, we learn our lesson.

  5. Dear anonymous,

    This was an excellent comment and I thank you for posting it. Maybe human society has advanced to a stage that it can recognize the danger before it has to suffer the consequences in order to change its ways.

    The US model of perpetual consumption is increasingly getting questioned in Europe. Unfortunately there is the matter of 1.3 billion Chinese who have bought the US model... oh, well...