This is the generation that learned to live beyond means. Much beyond, infact, as their debt to disposable personal income peaked at 130%. So much so that income ceased to be the criteria for consumption pattern. Wealth did. As cheap credit fuelled strong growth resulting in increased consumption demand leading to further growth, asset prices continued to defy gravity. MEW (Mortgage Equity Withdrawal for the unintiated) became the buzz word. As economic logic took leave of their senses, the boomers felt that they reached their el dorado. The insatiable (nay uncontrollable) urge to splurge led them to devastate their wealth with the foolish notion that the wealth would rebuild itself, as the prices will continue to rise. Little did they realise that Murphy's law will catch up with them.
Something had to go wrong and it did. Unfortunately for them conducive economic environment meant that things soured much later than they should have. And when it did, it appeared like a tsunami.
Result? 3 out of every 5 baby boomers do not have enough to save, as per an article by Wall Street Journal. It is expected that the return people can hope to earn on their assets has fallen, particularly for those who switch into bonds or annuities to guarantee a fixed income. The average yield on U.S. government, corporate and mortgage bonds stands at about 2.4%, while stock-market valuations suggest a long-term return of about 6%. At those levels of return, some 59% of people aged 56 to 62 will be at risk of not having enough money to cover basic living and health-care costs in retirement, estimates Mr. Van Derhei. If market returns are higher—8.9% for stocks and 6.3% for bonds—the picture isn’t a lot better: The percentage at risk falls to about 47%.
In effect, the baby boomers are shattered and consumption is likely to remain muted for times to come. They are spending less and, looking at the pathetic state of their retirement fund, they are more likely to consume less and save more going forward.
My feeling is that this is going to spawn a generation of thrifty consumers, a generation that has seen the devastation wrought by their ancestors, a generation that is experiencing a hard to get job situation. As the unemployment data shows, unemployment among the youth is high. Very high in fact. In such circumstances, it is very difficult to expect another generation of reckless consumption. While this is good for the economy in the longer term, the pain that will be felt during the transition from recklessness to a more responsible behaviour will be immense. There can be no penance without pain.