#RebootingRetail Macro Analysis: 1919–2019 R.I.P. Consumerism
(~10-15min read) This chapter didn't get the readership I thought it should during content testing in the final manuscript selection, so I am republishing it here since I think it is an important "thought-provoking" macro scenario that I'd love to discuss with anyone invested in the future of retail and the American economy.
1919–2019 R.I.P. Consumerism
It was a good run. Well, maybe not really, (as you will see and feel shortly after completing this chapter), but it was a BIG run nonetheless.
Maybe you have asked yourself how dozens of brands from Sears, Toys R Us, Vitamin World, True Religion, Gymboree, Payless, Gander Mountain, Radio Shack, The Limited, BCBG Max Azria, Aerosoles (source https://www.retaildive.com/news/retail-bankruptcies-2017/446086/) to name a few all filed Bankruptcy in 2017 and 2018 with hundreds of more brands shutting down several hundred stores.
Simultaneously to this retailer calamity, Amazon and Apple went over the trillion-dollar market cap mark thanks in part to a decade-long bull market with Dow Jones cracking 25,000 and employment at an all-time low. But, the underlying drivers of the consumer economy are cancerous and terminal, and preparing your enterprise for the coming shift and turbulence should be the utmost priority if you value survival.
More on this later, but a few things to ponder until we do. First, this isn’t about internet retailers (Amazon) beating traditional retailers, although e-commerce growth has played a major factor. Secondly, this is about customer-centric business models beating product-centric business models. Third, and most important, are a few questions to ask as you take the insights and new rules from this book and prioritize when and how to apply them within your organization.
What will happen to my brand and others like it when the stock markets correct and the next recession or depression hits if the consumer is already layered in unprecedented levels of personal debt?
When the bulk of the brands face bankruptcy in this coming new reality, what can we do to optimize our business operations to become customer-centric while preserving cash for an unprecedented buying opportunity to purchase legacy brands at pennies on the dollar in the coming three to five years?
Where are we most vulnerable today as an organization? (i.e. some common examples would be: a) over-leveraged and cash poor; b) siloed and operationally inefficient; c) nimble and agile with a growing loyal customer base but undercapitalized or distributed, etc.
READING THE TEA LEAVES
When the dust settles and history writes the story about the day consumerism died, it will end up just shy of 100 years (maybe a little shorter or maybe a little longer) depending, but for those wondering the exact time of death, please realize that the round numbers say that the consumerism we all know is presently on life support waiting for the proverbial plug to be pulled somewhere between mid 2019 and late 2021. By the way, despite the imminent chaos and temporary pain, it will cause all of us and our businesses, the death of consumerism isn’t all bad, and can’t come soon enough if we all want to leave the world and the economic machine in a more sustainable place for our future generations.
For some of you who hold sustainability as core value you probably already knew this. For the rest of you, we venture to guess that you have had the very unsettling intuitive feeling that an end to consumption as we know it is forthcoming. We posit that this is the reason that the pop-culture hit shows of the last decade feature stories of a zombie apocalypse, a feudal system of usurpers, totalitarian survival, Viking raids, and purely narcissistic reality tv stars dumbing-down the multitude further while raking in billion-dollar celebrity brand valuations.
Regardless of where you lie on the spectrum of belief or disbelief that consumerism is dead, you (as a brand leader), have the responsibility to prepare for this reality now. To be blunt “take effective action immediately if not sooner”. We also hope that after you make it through this tough-love, yet illuminating chapter, you will be inspired to see a moral obligation to make an impact in whatever way you can and help lead us into the bright future that can lie ahead. An equally amazing opportunity awaits this coming decade if we face our brutally ugly truths of systemic cancer together.
The age of American consumerism (and the global consumerism that it helped spawn as a side-effect) is officially dead-on-arrival as we close out 2018. The time to take your profits, pay down leverage, cut overhead and hoard cash for a big sale is NOW! Alibaba just posted a record-breaking Singles Day 11/11/18 with over $30B (USD) in sales and Amazon broke their own previous records, but don’t be fooled. For the majority of the retailer and brand market, the sun has set, and soon even the unsinkable Amazon machine will face devastating losses once this credit cycle dries up.
How could we make such a bold or potentially controversial statement at a time where both Singles Day 2018 and Black Friday-Cyber Monday 2018 set all-time record sales highs?
We are glad you asked...
Our prediction will likely be met with an immediate gut-reaction of disagreement by you If you haven’t studied much monetary policy in the past, or read some of the foundational (non-retail industry) books like The Creature From Jekyll Island by G. Edward Griffin (1997) , The Devil Takes the Hindmostby Edward Chancellor (2000), The Fourth Turning by William Strauss and Neil Howe (1997), or The Everything Bubble by Graham Summers (2017).
Put those on your list of must-reads after this book for a red-pill trip (source: The Matrix). For now please keep your mind open and refuse to accept, reject, or neglect any of the ideas in this chapter until you have fully immersed your brain in a thought exercise around the implications of a new set of economic realities. You will soon need to manage your business and throw out everything you think you know about how the economy works today and rapidly understand and prepare for how it will work in the future.
We predict that the last decade of life support that is current central bank policy on a global scale (which began a little over 100 years ago), finally gets unplugged in the coming year or two. The realities it will cause in all business will make 2008 look like a picnic at the beach with Dom Perignon. Likewise, the opportunities it will create on the other side of chaos are unprecedentedly amazing for those who prepare their brand and their business systems around a high-velocity, customer-centric, precision-performance business model and infrastructure.
THE STRAW THAT BROKE THE ECONOMY’S BACK
Consumer spending currently generates approximately 71% of the Gross Domestic Product (GDP) of the United States economy at the writing of this book. This is one of the dominos that can topple all the rest, (Figure 1.1) and it is approaching levels that haven’t been seen since 1929–1932 where it was 75%-83% of GDP, respectively. Winston Churchill said once “The farther you look into the past, the further you can see into the future.”
At the height of the Great Depression and during all of World War II consumer spending dropped to 50% of GDP. (source: https://en.wikipedia.org/wiki/Consumer_spending) The difference this time, is that post Depression and after The New Deal we began a dangerous unraveling of the core value of a currency in all forms and the financial backstop that existed in prior corrections has fundamentally been moved to a critically-ill status, with no more levers to pull once the music stops this time.
Enjoy some of the related macroeconomic charts and figures throughout this chapter for a visual support and broader context of the systemic issues and cancers that will absolutely put the last nail in the consumerism coffin.
This cliff notes version of a red-pill trip down the history of how our economy got here, where we are likely headed, and why you need to care, will provide you the proper foundational context to understand the lens by which we have analyzed and laid forth the new rules of retail later in this book. Throughout this new set of rules are the potential safeguards we believe you must put in place to survive, profit, and thrive in the next system when the inevitable collapse of this one finally happens.
Let us start first with some basics and align on a clear definition of consumerism.
Consumerism- is an economic theory which states that a progressively greater level of consumption is beneficial to the consumers. (source Mt Holy Oak https://www.mtholyoke.edu/~kelle20m/classweb/wp/page2.html)
We will walk through some of the key timelines that helped enable and drive the mass-scale adoption of the consumer mindset over the last ten decades, but it is key to understand the five basic stages of today’s current consumer cycle since they represent the status quo that has driven all business strategy and planning for the last century of a material economy.
THE BIRTH AND LIFEBLOOD OF OUR MATERIAL ECONOMY
There are five phases of our Industrial Age & Information Age consumer cycles that collectively make up the material economy we have lived in for the last 100 years. Please note that the fundamental problem with our material economy structure is that these phases are linear and we live on a finite planet.
At every step in this journey, this current system bumps into and against limits because a linear and infinitely expansive design for growth, can’t exist sustainably in a finite environment.
Nonetheless here are the five phases of our current material economy.(source: Story Of Stuff, referenced, and annotated Script By Annie Leonard https://storyofstuff.org/wp-content/uploads/movies/scripts/Story%20of%20Stuff.pdf)
Extraction — the exploitation (and inefficient destruction) of natural resources in order to get to the elements (metals, etc.) inside to make our stuff. As consumption has grown since the 1980s we collectively have used up over one-third of the planet’s natural resources without replenishment. (Source Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism, Little Brown and Company, (1999). Paraphrased from page 4: “In the past three decades, one-third of the planet’s resources, its ‘natural wealth,’ has been consumed.”)
The biggest problem with the current model is that the rest of the developing world is now craving American-type consumerism as they experience a middle-class explosion and in present numbers the U.S. has only 5% of the world’s population, consumes 30% of the world’s resources, and creates 30% of the world’s waste. What happens as China, and India and other countries follow in this path! The math doesn’t work and the curve of acceleration is simply devastating and all of our collective responsibility to shift. (Source: This figure is cited in many places. For example, John L Seitz: Global Issues: An Introduction, (Wiley 2001 https://www.amazon.com/Global-Issues-Introduction-John-Seitz/dp/047065564X)
Production — This is where we consume energy to mix toxic chemicals with our recently extracted natural resources and create toxic and contaminated products that are then consumed and disposed of in our oceans and landfills and leach into the future natural resources that will be extracted creating mostly unknown impacts that have most likely shown up in the way of unexplained increases in cancer, infertility, allergies, and other humanitarian issues.
According to the Worldwatch Institute, in 2006, over 100,000 synthetic chemicals were in commercial use and only a fragment of them had ever been tested for human health impacts and zero were tested for impacts that are derived from when they interact (or are mixed) with other chemicals we are exposed to everyday. (source: www.ourstolenfuture.org and Nancy Evans (ed.), Breast Cancer Fund , State of the Evidence 2006 Executive Summary, available at http://www.breastcancerfund.org/site/ pp.asp?c=kwKXLdPaE&b=1370047; Gay Daly, “Bad Chemistry” (NRDC) at http://www.nrdc.org/onearth/06win/chem1.asp;
Distribution — This is the next step in the current system where we endeavor to sell all this toxic stuff as quickly as we possibly can. The goal at this stage is to keep the prices down and that means to keep people (i.e. consumers) buying as fast as possible to keep the inventory moving throughout the system. The methods deployed in recent decades to keep the prices down have included externalizing costs like health insurance and keeping wages low in comparison to the rise in asset prices and productivity (more on this later).
The problem with this step is that these externalizations of costs translate into the reality that as consumers none of us are paying the actual true cost of the products we consume. The real costs are born by the people living in the region where the natural resources are drying up, the loss of their clean air and water (increased asthma and cancer rates) in the developing countries where we have moved all the dirty factories, and the loss of their future (i.e. 30% of kids in the Congo drop out of school to mine coltan which is a metal we need for our disposable electronics). (source: Burge & Hayes, 2002) “Coltan is used in cellular phones, computers, jet engines, missiles, ships, and weapons systems…Without coltan, the digital age economy would grind to a halt….. Sixty-four percent of the world’s reserves of coltan are in Democratic Republic of the Congo (DRC), a nation racked by poverty and war.” (Montague, 2002) Many of the Coltan miners are children. See: “Reports say a third of the region’s children are giving up school to dig for coltan.” From Seeing is Believing, Episode 1 Autumn 2002, retrieved 11/11/07 from http://seeingisbelieving.ca/cell/kinshasa/; and “Researchers at globalissues.org estimated that 30 percent of schoolchildren in the northeastern region of DR Congo have abandoned school to search for Coltan”, from “Dial ‘C’ for Civil War” by Jill Gregorie in GENERATION, retrieved 11/11/07 from http://www.subboard. com/generation/articles/113927134460289.asp; and “Many coltan miners are children. Some estimates suggest that 30 percent of schoolchildren in the northeastern Congo have abandoned their studies to dig for coltan.” in “A Call to Arms — demand for Coltan causes problems in Congo” by Kristi Essick, Mark Boslet, Boris Grondahl in The Industry Standard, June 11, 2001; and “The United Nations reports child labor in Africa has significantly increased in coltan and diamond mines. In some regions of the Congo, about 30 percent of schoolchildren are now forced to work in the mines.” Excerpted from: Stats & Facts on Child Labour in Mines and Quarries by Global March Against Child Labor, at http://www.globalmarch.org/events/facts-wdacl.php3; and “Cell phones fuel Congo Conflict” at http://seeingisbelieving.ca/cell/ kinshasa/; also: “Furthermore, reductions in school attendance and the presence of child miners were apparent and oftentimes children served as forced labor “ quoted in “Congo, Coltan, Conflict” by Benjamin Todd in The Heinz School Review, |Volume 3, Issue 1, March 15, 2006.
Lastly, as it relates to this driving force and need to keep prices down against the constant net inflationary cost of everyday items for the consumers which comes from the rapid loss of purchasing power of our current FIAT currency system the last 100 years as seen in Figure 1.2, which we will dive into in more detail shortly.
Figure 1.2 The Purchasing Power of the U.S. Dollar 1913–2013 (additional dates added by The Resilience Grouphttps://visual.ly/community/infographic/economy/purchasing-power-us-dollar-1913-2013)
The Bottom line:
Every day we feel the ‘pain at the pump’ or ‘pain at the grocery store’ as the cost of fuel, rent, food, and other necessary commodities continues to rise on a relative basis as a percentage of the average person’s disposable incomes and this perpetuates the producer and distributors need to externalize more costs and drive the prices down on a non-relative basis.
Consumption — The engine that has driven all of our material economies for the entirety of your (the reader) and our (the authors) lives. It is all any of us have known because very few of you reading this were born, let alone consuming stuff in 1913 when the current central bank economic machine was legislated into existence.
Consumption is the foot soldier of a flawed economic form of centralized (monopolistic) financial engineering that is sold as a free-market capitalism, so that the under-educated can be pitted against one another politically through each bubble burst as those who love capitalism and those who don’t, when the puppet masters socialize the losses while privatizing the gains of the next bubble by taking newer and greater risks. After the 9/11 terrorist attack in New York the main message to Americans in the aftermath as the technology stocks crashed was “To shop and to buy a home” because the only way forward was to inflate a new bubble in what really is full-blown cronyism (not free-market capitalism) that actually has ruled the state of our economic landscape the last 60 years.
Consumption keeps the engine of a military-industrial complex and central bank monopolized global economy humming, by distracting the developed world masses with a consistent sugar-high of euphoric faux-prosperity, while an underlying disease of debt-induced stress and fragility ruins lives and trashes our spaceship Earth. The message to shop, shop, shop is based on the economic need to keep materials flowing through this broken system.
Disposal — How inefficient is our use of natural resources? Well according to Paul Hawken, in his book Natural Capitalism (2010) in six months production cycles we trash over 99% of the raw materials we use to make stuff.
“In short, the whole concept of the industry’s dependence on an ever faster once-through flow of materials from depletion to pollution is turning from a hallmark of progress into a nagging signal of uncompetitiveness. It’s dismaying enough that compared with their theoretical potential, even the most energy-efficient countries are only a few percent energy-efficient. It’s even worse that only one percent of the total North American materials flow ends up in, and is still being used within, products six months after their sale. That roughly one percent materials efficiency is looking more and more like a vast business opportunity. But this opportunity extends far beyond just recycling bottles and paper, for it involves nothing less than the fundamental redesign of industrial production and the myriad uses for its products. The next business frontier is rethinking everything we consume; what is does, where it comes from, where it goes, and how we can keep on getting its service from a net flow of very nearly nothing at all — but ideas.” (emphasis added by the authors) (Source: Hawken, Paul Natural Capitalism: The Next Industrial Revolution Earthscan; 2 edition (April 30, 2010) https://www.amazon.com/s/ref=nb_sb_noss_1?url=search-alias%3Dstripbooks&field-keywords=natural+capitalism)
The two mechanisms that have powered your stock price and shareholder returns along with the five phases in a material economy will be very familiar to the reader.
These two strategic forces are the major culprits that have contributed to the excessive global production and consumerism in America and abroad as other more populous countries follow suit, (amplified by the last four decades of globally coordinated central bank policy).
Again it is important that despite your prior understanding of these two forces that we attempt to align with our definition of these two things as it relates to the context we are developing for you in this text.
Planned obsolescence: When companies design products so that people will need or want to throw them out soon after they buy them. Think of everything that you have bought in the last couple of decades from your appliances to your smartphone and realize hear your parents or grandparents voice saying “They don’t make’em like they used to…”
Perceived obsolescence: Essentially this is the age-old notion of “keeping up with the Joneses” or as we currently refer to it as FOMO (Fear of Missing Out). Because the very nature of the business model is based upon planned obsolescence we have advertised and marketed to consumers the enhanced features, gimmicks, of our latest models to convince them that in order to stay ahead of their peers and the competition that they need the latest greatest model. Fashion brands bring back the 70s-80s to Millennials and the 90s to the Gen Zs (while their Gen X parents laugh and cringe like every generation before them with nostalgia), because everything in the current model is about an ever-increasing consumption volume, with higher rates of inventory turnover.
Phew, you are still with us! That was some heavy (and probably depressing S#%T) to throw on you right out of the gate. We know. So we want you to take a breath before we dive deeper and tweet out @chrisjsnook @dannydemichele (and tag #rebootingretail) one of these two choices to let us know how you are feeling right now. 1) “#holyshitbatman this #rebootingretail book is intense, has me re-evaluating everything, and I just got started” or 2) “#noshitsherlock the #materialeconomy #unsustainableprinciples of the last 100 years is why I am proud to be part of the solution at (@insert your brand handle here”)
Okay back to our regularly scheduled program…
The Austrian Economics school of thought founded by Carl Menger et al in 1871 and preached the concept of methodical individualization. This is the concept that social phenomena result from the motivations and actions of individuals. It is this dogma that provided the baseline foundation for what we know now as modern day consumerism.
Since, you already have half of a brain aneurysm from the last several pages and we need to keep this moving along with a high-level history lesson and enough detail to cover the basics, you can dive deeper into the positive and negative applications of the Austrian Economics school of thought if you wish by reading books like The Dao of Capital by Mark Spitznagel and Ron Paul and America’s Great Depression by Murray Rothbard and Paul Johnson, respectively, if you feel so inclined.
LET THERE BE BUBBLES:
We are going to give you a rapid-fire historical timeline filled with several cocktail party Easter Eggs as a proxy to illuminate the policy decisions that have provided the framework for this current economic model you operate in.
🥚 EASTER EGG: The modern era of consumption was amplified in America shortly after Woodrow Wilson signed into law the Federal Reserve Act of 1913 in December of that year.
🥚 EASTER EGG: In 1919, The General Motors Acceptance Corporation (GMAC) was formed and the first to create a model of “Buy Now-Pay Later” (source https://www.mtholyoke.edu/~kelle20m/classweb/wp/page2.html)
This new ability to buy a car with a loan spurred the mass market consumption of automobiles and the habit of using consumer credit to purchase anything and everything in the years to come. (Source: https://en.wikipedia.org/wiki/GMAC)
General Motors also continued to drive consumerism on the back of this new money game in the early days by being the first major auto company to introduce innovations like the yearly model change, brand architecture, and planned obsolescence in the 1920s-30s under the leadership of longtime Chairman/CEO/President Alfred P Sloan (source https://en.wikipedia.org/wiki/Alfred_P._Sloan).
A DREAM WE ALL COULD HOLD ONTO IS BORN
🥚 EASTER EGG: 1929–1945 saw the first major bubble burst in the Federal Reserve era and austerity took hold across the country as advertisers and brands promised that new products would be available once the war was finally over. In 1931, James Truslow Adams penned The Epic of America and is credited with coining the phrase “The American Dream”. (source: https://en.wikipedia.org/wiki/American_Dream)
🥚 (REBOOTING RETAIL AUTHOR FUN FACT/EASTER EGG: James Truslow Adams who coined “The American Dream” was an American author born on Oct 18 1848 sharing a birthday with Rebooting Retail’s very own Chris J Snook). We have another hidden surprise later in the book revealing a major figure in retail that shares a birthday with Danny DeMichele, but in the meantime take another quick break and we will give you some social media RT (retweet) love.
Great job getting this far. 👏👏 Take a minute and tweet to us @chrisjsnook @dannydemichele a picture or GIF of your favorite historical birthday twin. Then get back to reading so that you kick some legacy-building ass and someone tags you in 200 years as their favorite historical birthday twin.
🥚 EASTER EGG: The concept of The American Dream was rooted in the Declaration of Independence but this new marketer friendly spin galvanized the nation into a shared sense of hope and possibility. Consumers knew that they would have to wait until the war ended, however, to experience it. This poured gas on the future of consumption as it created a groundswell of latent demand during a 15 year period of collective sacrifice and depressionary pain.
🥚 EASTER EGG: 1945–1970 “The American Dream” is officially born and sold as the post-war peacetime ensued, soldiers return home, and jobs in the manufacturing sector explode as America becomes the greatest beneficiary and world power to rebuild the cities and global economy that had been devastated during the World War II era.
As the baby’s boomed an entire generation was born into what Neil Strauss and William Howe have notated as the post-crisis “High” of the 20th century saeculum which saw the unfettered manifestation of The American Dream and created the possibly unintentional consequence and precedent of American prosperity that morphed into the current death spiral as the largest generation (by number) in American history began a habitual process of keeping up with the Jones. (source: Strauss and Howe, The Fourth Turning 1997 ).
🥚 EASTER EGG: 1950 saw the invention of every consumer’s favorite ‘retail-therapy’ companion with the first multi-purpose charge card by Diner’s Club founder Frank McNamara (source https://www.dinersclub.com/about-us/history) and quickly swelled to over 42,000 citizens by 1951. By 1955 Diner’s Club went international and achieved the 1 million cardholder milestone in 1959 as it went public on the New York Stock Exchange (NYSE).
A true middle-class economy was born on the back of expanding opportunity and credit, and the demand for consumer goods, houses, automobiles, and a college education penetrated mainstream society for the first time in America. After a devastating depression, these new realities were met with an unquenchable thirst by all stakeholders and citizens and the largest generation in American history came of age in a time of great economic growth and social change.
🥚 EASTER EGG: Amplifiers to this early 20th-Century momentum in consumerism were the new mediums of radio (1922) which eclipsed the 55.2% of all households mark by 1933 at the height of the Great Depression, and network television ads (1954) and the telephone passing 50% of all homes in 1946. (source: https://blog.hubspot.com/blog/tabid/6307/bid/31278/the-history-of-marketing-an-exhaustive-timeline-infographic.aspx)
These new mediums enabled a multi-decade post-war marketing revolution for brands seeking to penetrate the consciousness of the new American dreamers that were locked and loaded with growing incomes, growing families, a home of their own, and consumer credit. Mad Men (advertising agencies) ruled the next several decades as our arbiters of truth and what it meant to be wholesome, good, and happy and the destructive tenants of our material economy and its destructive five-phases took root in the fabric of our sense of sovereignty and self as the rest of the world looked in awe at American’s prosperity and longed for it themselves.
The short-term benefit of liquidity (i.e. public debt) from the New Deal seemed to have been working gloriously and as the chart in Figure 1.3 shows (by Presidential term and political party) how the decades rolled out related to public debt as a percentage of Gross Domestic Product (GDP). This is what created the true and faux prosperity that we have all come to know and love. Ironically, It is this very faux prosperity that will be the ultimate cause of death for consumerism. But more on that in a bit. Let’s get back to our history lesson.
Figure 1.3 (Source: Published on 2016–11–21 09:23:28 By Mage Oten http://ayucar.com/bmF0aW9uYWwtZGVidC1ieS1wcmVzaWRlbnQtY2hhcnQ/)
BIGGER AND BETTER AND GOING BANKRUPT
🥚 EASTER EGG: Consumer protectionism becomes a real thing at the end of the 1960s as Ralph Nadar made a name for himself fighting on behalf of the defenseless consumer and Richard Nixon proposed new legislation titled “Buyer’s Bill of Rights” on Oct. 30, 1969. (source http://library.cqpress.com/cqresearcher/document.php?id=cqresrre1972011200)
The 1970’s were marked by the notion of ‘bigger is better’ and the U.S. Congress handed out its first bit of regulation to protect consumers and rein in the aggressive advertisers by passing a bill to ban the direct mailing/solicitation by credit card issuers to consumers who had not opted in/requested them.
Five out of every six travelers to the United States in 1974 possessed a Diner’s Club charge card in their wallet making the country a destination for global consumption as well.
The credit-fueled growth was unprecedented in American history and where consumer credit stood at $21.5 billion in 1950, it had swelled nine-fold as of Feb. 28, 1975, to over $185 billion with approximately 80 percent of all consumers using credit to make purchases in some form. (source: http://library.cqpress.com/cqresearcher/document.php?id=cqresrre1975041100)
On August 15th, 1971 Richard Nixon held a nationally televised Presidential address and announced to the world that he would immediately end the U.S. Dollar’s peg to gold. This ended the Bretton Woods era agreement to peg the foreign exchange market to gold (source: https://en.wikipedia.org/wiki/Bretton_Woods_Conference ).
Prior to this decision Central Banks around the world could still exchange U.S. Dollars they owned for gold and this convertibility meant there was a limit on how many U.S. Dollars the Federal Reserve could print because the amount of gold in the system was finite. (Source: Summers, Graham The Everything Bubble 2017). By removing the “Gold Standard” Nixon created a FIAT currency out of the U.S. Dollar (a currency backed by no asset and only by the faith in its Government to pay its debts) and also removed any limit on the Federal Reserve to print dollars since now the U.S. was no longer forced to pay off its debt to the Federal Reserve in gold, and could pay it off with its own U.S. Dollars. Nixon was aware of the long-term consequences of this decision but was focused solely on re-election in 1972 and the short-term boost it would give the economy. After all, what did inflation matter in the future when it would be another President (and political party) who would bear that cross of economic fallout?
Nixon was merely following in the footsteps of a predecessor 40 years earlier by passing equally devastating legislation to our financial system. The difference was he wasn’t doing it to solve a widespread crisis in a time of a catastrophic Depression, he was doing it to merely get re-elected.
It is important to note that this decision was as catastrophic (relative to the New Deal legislation enacted between 1933–1938 (source: https://en.wikipedia.org/wiki/New_Deal) and the “criminal” gold confiscation legislation by Franklin D Roosevelt’s (F.D.R.) Executive Order 6102 in 1933. (source: https://en.wikipedia.org/wiki/Executive_Order_6102https://en.wikipedia.org/wiki/Executive_Order_6102)
F.D.R. has been far more revered than Nixon by historians, but make no mistake that he set the criminal precedent by outlawing the possession of gold in 1933. The short version impacts (clever academic justifications aside) of F.D.R.’s Executive Order 6102 are as follows:
Congress was not involved (it was an Executive Order). It was the first sign of a dictatorial (non-democratic decision) that impacted the economic welfare of a nation and subsequently the global economy as we now experience it today.
It allowed the U.S. Government to confiscate every American citizen’s gold possessions and fined anyone who was found in possession of now illegal gold assets, the equivalent of $185,000 in today’s dollars ($10,000 in real terms in 1933).
It forced Americans to store their wealth in U.S. Dollars or U.S. Dollar denominated assets.
It led to the passage of the Gold Reserve Act of 1934 which allowed the U.S. Government to choose to pay its debts in U.S. Dollars while holding onto its Gold Deposits (source: https://en.wikipedia.org/wiki/Gold_Reserve_Act )
F.D.R. then raised the price of an ounce of gold to $35/oz from its prior price of just under $21. This immediately devalued the U.S. Dollar by over 69%. In other words it eradicated the equivalent of almost 70% of all the money people had saved, and was by far the largest theft of American’s wealth by their own government until 2008.
NOTE TO THE READER: Please read Graham Summer’s “The Everything Bubble”for a thoroughly succinct but brilliantly clear and documented historical understanding of how our global economy has gotten to the brink of one final pending collapse to reset it all.
Nixon’s move, however, took things to a whole new level and for the first time in modern economic history, the ultimate “risk-free” store of value became U.S. debt (a non-tangible asset).
Rising prices due to the creation of a true FIAT (backed by nothing but trust in the government not to default) currency inflated the people’s borrowing needs but simultaneously slashed the share of income available to them to pay their debts. At the same time, a recession had taken its toll in jobs and salary expectations, reducing even further, the people’s ability to repay what they owed.
Personal bankruptcies naturally began to rise as the economic recession of the mid-1970s took hold. The number of personally bankrupt consumers rose 33 percent in 1974 to 103,216, almost one-third more than in the second half of 1973. (source: http://library.cqpress.com/cqresearcher/document.php?id=cqresrre1975041100)
By the end of the decade in 1979, the average American family was spending 23 percent of their disposable income on consumer debt service. In that same year, there were approximately 600 million credit cards outstanding which represented seven cards for each of the 82 million Americans who used them.
High inflation, lower wage, and employment growth numbers, and a knee-jerk desire by baby boomers to maintain their current standard of living drove savings rates amongst Americans to a 30-year low of just 4.5% of income. The 20 to 25-year cycle called “The Awakening” by historians Neil Howe and William Strauss in their must-read book The Fourth Turning (1997), was in full swing as the first members of Generation X were in the midst of elementary school.
The need for dual incomes and the desire to continue to expand their middle-class lifestyle saw the expanding reliance on the medium of network television and other commercial mediums to entertain this new generation of ‘Latchkey kids”.
Referred to as “day orphans” in the 1984 documentary, To Save Our Children to Save Our Schools, came mostly from middle or upper-class homes. The higher the educational attainment of the parents, the higher the odds the children of this time would be latchkey kids. Keeping up with Jones had gone to the next level as we became addicted to a life of “more and better” in an economic machine that was taking the value of our purchasing power rapidly in the opposite direction.
HOW WILL IT ALL END…AND BEGIN AGAIN?
Obviously the scope of our world economic system is far too complex to cover in multiple books let alone this one chapter, but we will conclude with a current state summary of what money is (actually) today, and what will trigger the next (and likely final collapse) of the only economic system we have all known. The aforementioned books throughout this chapter are there to serve the curious (or serious) planners, leaders, investors with a more thorough understanding so that you can personally and professionally prepare accordingly.
A summary of key milestones that fueled and will kill consumerism is bulleted for you to research on your own at a later date.
1913 — The Federal Reserve Act creates the fourth Central Bank in American history. The Fed is given the sole right to control the production of U.S. Dollars though it is not officially a part of the U.S. Government
1933 — F.D.R. begins the separation of the U.S. Dollar from a Gold Standard with Executive Order 6102 setting in motion the U.S. Dollar as a completely FIAT currency “paper money”
1971 — Nixon finishes the job of severing the U.S. Dollar completely from a link to gold and the U.S. began issuing debt aggressively (as moving forward all debts would be repaid in U.S. Dollars which could be printed at will now by the Federal Reserve).
1980–2006 — Reaganomics (Ronald Reagan) begins and are fueled initially by Fed Chairman Paul Volker before handing the baton to Alan Greenspan in 1987 (late in Reagan’s 2nd term) who would remain at the helm of the Fed for an unprecedented five terms and create the most catastrophic loose money policy and faux economic prosperity in history before handing the reigns over to Ben Bernanke in 2006. Greenspan’s decisions change the role of the Federal Reserve as a manager of bubbles, to the creator of asset bubbles as economic policy.
2006 — Ben Bernanke (an active critic of several of Greenspan’s decisions, takes over as Fed Chairman.
2008 — Ben Bernanke finds himself in the driver's seat as the global economy freezes up and faces a collapse, and chooses to follow suit with his predecessors and perpetuates the exponential money printing for the last 10 years. It is during this time frame that we have had the longest run of economic growth without a recession in the history of modern economics and the main reason why is because at this point we have gone from gold being currency, to a paper currency, to asset-backed debt being currency to now sovereign bonds being currency, and this is the end game. When this book is released the U.S. National Debt will exceed $21 Trillion dollars (almost triple what it was just 10 years prior) and a Graham Summers points out, the Fed has grown the economy since 2008 by ensuring that every asset class is a bubble tied to the continued appreciation of U.S. sovereign debt. The slightest deflationary pressure in those bonds will crash the entire system into oblivion, which means we must continue down the current path, and yet continuing to add weight to this burden is a sure-fire way to collapse the entire thing without any levers left to pull to bail us out.
Consumerism. Is. Dead.