Sunday, April 26, 2020

The Vanity Economy: The First Casualty in the Next Recession (Video Transcript, April 26, 2019)

This is the transcript of my Demographic Doom video released on 26 April 2019 (one year ago). It is based on the auto-generated YouTube transcript with some light editing. Video by Glenn Campbell. Project:

If you want to know how bad the next economic crash will be, you just need to walk down the street of wherever you live, especially if you live in America. Just walk down the main street and look at all the businesses along the road and in shopping centers. You might see a florist, and here's a home renovation center, and here's a martial art studio, and all these other things, all these other services, and ask yourself are those businesses essential?

And all these products and services I call the "vanity economy". You might think of this as the luxury economy but we usually think of luxury as yachts and sports cars and mansions. The vanity economy, as I define it, is something that we all participate in, in that we buy things that we know we don't really need, but we feel we need them. These are the first things that are gonna fall apart in a big economic downturn.

You might see these businesses as a mark of prosperity, because people seem to have enough disposable income that they can they can buy these vanity items, and you might see this as good. Okay, we're a rich society so we can do these things, but the other side of the coin is whenever things go bad, we don't need to do those things, so we're gonna cut them out, and it just means that we have much further to fall.

Now we all know that a crash is coming. We may disagree on why it is coming or when it is coming, but we can agree based on past history that every once in a while there's a big crash. My personal theory is that this crash will be powered by demographics, by the fact that there are so many old people, so many retired people, so many people leaving the workforce and not many people coming into the the workforce, but this isn't the time to talk about that. You may not agree with me, but you can agree that there's going to be a crash, and when there's a crash people get laid off or they feel at risk of being laid off, and what's the first thing they do? They're going to cut their expenses, and the expenses they're gonna cut first are all of these vanity items.

They're gonna cancel their gym membership, and they're not gonna do any home renovation, and they're not gonna be buying any flowers. So when this happens, all those vanity businesses are going to be in deep trouble, and they're gonna start laying people off, and when that happens even fewer people have money to spend on these vanity services and it becomes a self-reinforcing cycle, what physicists call a positive feedback loop.

Now a positive feedback loop is not "positive" in that it almost always results in some kind of disaster. A positive feedback loop is when there's a change in a system, that change feeds back to accelerate the original change. So the more people that are laid off the less money they have to spend on flowers, and the more the florists lay off workers, then there's fewer people to buy stuff. So this can be a cycle that economists call a deflationary spiral, and the best example was the Great Depression. After the stock market collapsed, people had no money, so they stopped buying cars so the price of cars went down. So in the modern world this can happen perhaps without any actual deflation, without anybody cutting prices, but it's still a spiral, a death spiral that takes everything down.

This is exactly what happened in 2008. No one was doing anything; no one was buying anything; no one was initiating new projects. That's when the central banks lowered interest rates and the government's pumped a lot of money into the economy to get it restarted again. The trouble is, in the next economic crash, they don't have those those tools anymore. They're so deeply in debt that they really can't pump a lot of money into the economy without jeopardizing their credit rating, and they can't lower interest rates because interest rates are already close to zero, so we're going to get the same thing again where nobody buys any vanity products and things just accelerate down to the bottom, down to some base level where people are just surviving and just buying the products and services they need to survive.

The trouble is that's an extremely low level. If the economy is in the dumps for six months, people are going to cut their obvious expenses, cut their gym membership, but they basically want to keep the same lifestyle they had before. If the downturn lasts for years then people are going to start modifying their lifestyle and cut their costs even more, which is going to further accelerate the decline.

For example if you have a dog and you lose your job you're still going to feed your dog. You're still going to take your dog to the vet when the dog gets sick because those are seen as essential products and services. Two years later, your dog dies as dogs tend to do, and this time because you're in economic stress, you don't get a new dog. So now you can cut your your expenses even more. You're not held down in terms of where you live by your pets. You can you can cut your expenses to even lower.

And that's good, in that people should be economical. It's good for the soul to use your resources well, but it is horrible for the economy, especially an economy over the past 50 years or so which has come to depend on all of these vanity products and services. You kno1w the steel industry seems like it should be immune to this, but it isn't because the steel industry feeds the auto industry, and if you're under economic stress you're not gonna buy a new car, so that means no auto industry and no steel industry.

So this is all gonna come down. Sooner or later, it's gonna come down. It came down in 2008. The government temporarily rescued us by pumping a lot of credit into the economy so people were able to buy more stuff because they borrowed more money. If you see a big beautiful SUV on the highway, you know people didn't pay cash for that SUV. They got an auto loan, so all this prosperity we've known since 2008, it has been fueled by debt that is gonna collapse when the vanity economy collapses. Eventually the debt economy is going to collapse because what happens when you lose your job or you fear losing your job is you're gonna cut your expenses, you're gonna cut out all the vanity items that you don't need.

And when that doesn't work that you still don't have enough money you're gonna cut out your debt payments. In other words, if you've got a student loan now and the student loan is a big burden every month, you might just not pay that that. You might stop paying that student loan. A lot of people are already doing it. If enough people do it and it gets out that nothing really bad happens when you don't pay your student loans, a lot of people are gonna do it. So you've got a whole economy full of people who aren't buying things they don't need and who are refusing to pay make their debt payments.

They're not making their payments on their SUV. They're saying, "Just come and take my SUV," because you if don't make your payments on your car, well you still got three months of free use of that car before they catch up with you. So this is the kind of disaster we're facing once we get into this cycle into this these feedback loops, these positive feedback loops that just drain everything. Then eventually the government can't function, because government taxes depend on people being employed. Over time, the government can't function. The government can't repair the roads. It can't maintain basic services, and you've got big governments collapsing.

So what we're looking at in some future financial crash is essentially a Dark Age, an age where everything that we've come to depend on, all the institutions we've come to depend on collapse. Governments collapse. Banking systems collapse. This doesn't people mean people are going to die. It just means people are going to be lost for a while, and they'll have to restructure themselves in some way without these institutions. I can't say in advance how they're going to restructure themselves. That's something to be determined, but just like the Dark Age of the Middle Ages, there's going to be a Renaissance at some point where people pick themselves up, group together in some way and find a new way to structure themselves without the excesses of the old days.

So all of this flows from you walking down the street in your hometown or wherever you live, looking at each of those businesses that you see and asking yourself, what's going to happen to them in an economic downturn? And I'll bet you for 80% of those businesses, they're not going to survive because they're not essential.

I'm gonna go for a walk. Hope there aren't any alligators.


Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.