EDUCATING THE CONSUMER

      For roughly forty years, the United States economy has been characterized by price inflation. People in their 50's and 60's can remember a five cent bottle of Coke and a 20 cent gallon of gas. Younger generations have lived their whole life knowing that if they didn't buy today, the price would be higher tomorrow. (Every rule has an exception. The obvious exception to this rule has been in the area of technology where improvements have exceeded the rate of inflation such that a personal computer today is many times more powerful than a similarly priced unit of years ago.)

      Hand in hand with inflation, our economic system became very efficient at extending credit so that people could finance purchases that they otherwise couldn't afford. The American consumer is indoctrinated to "buy now and pay later". There have been some very strong incentives over the years to support this kind of behavior. For example, financing one's house during a period of rising prices provided leverage which magnified the homeowner's return on equity.

      Behavior patterns are typically slow to change, so it should be no surprise that consumers may react to miscues and be temporarily fooled by changes in the economy. If consumers are used to paying 6% or 8% or 10% for an auto loan, and they are suddenly offered 0% financing, it looks like a deal too good to pass up. If consumers expect to pay $90.00 for a good pair of leather work boots and they see the boots on sale for $72.00, again it looks like a deal too good to pass up. If these are one-time events, the consumers are behaving rationally in the context of a rising market by "purchasing on the dip", or taking advantage of the sale. However, if these discounts are the beginning of a longer term trend, how stupid is the consumer that paid $72.000 for a pair of boots going to feel when the same boots are offered 30 days later for $59.95???

      In an economy that is in a long term down trend, the consumer will eventually learn two things: 1) Don't buy now. Things will be cheaper later. 2) Don't finance to buy now. Save money to pay cash later and you will not only buy at a lower price, you will save the cost of interest. When a company like General Motors offers 0% financing, they are in essence saying that they realize it doesn't make sense for the consumer to pay the cost of financing, so they are removing the cost to the consumer. But the cost is still there. Someone has to absorb the cost, so it is built into the price. This means if you pay cash, you should be able to purchase at a lower price than someone who is financing at a 0% interest rate.

      Auto sales were surprisingly strong in October, which may make one think that the economy is on its way to recovery. Although this is a possibility, it is perhaps more likely that 0% financing simply fooled the consumer. Many people saw the incentives offered by the auto companies as irresistible. But how stupid are they going to feel when they realize that they could have purchased at an even better price if they had waited? Only time can teach this lesson. So it is going to take time for the consumer to learn the new behaviors that are required to survive in a disinflationary or deflationary economy. Unfortunately, as people learn to postpone their purchases, this simply exacerbates the downward spiral in the economy. Although we would all like to believe that there will be a quick recovery to the recent economic slowdown. There is a very clear danger that we are only on the leading edge of the slowdown, and it will take a long time to complete the full cycle to recovery.