To me, this is one of the most pressing questions facing us with regard to our markets and how they'll evolve in the next period. Will the consequences of our previous actions lead us to change our behavior? Or will the government succeed in trying to get us to return to wild consumption?

The Lesson at the Pump

Imagine you're an Arabian prince, if you can. You're the potential beneficiary of a globally necessary commodity (oil), of which you have a large but finite amount. Your job, essentially, is to maximize revenue. This is the simplest of economic equations: Price x Quantity = Total Revenue. Up until now, the demand seemed to be insatiable, so the best idea was to continue to increase price while pumping as fast as possible. 

End of thought experiment. Back in the good ol' USA, filling up that Suburban or Escalade went from costing $50 per tank to costing nearly $150 per tank. Now, I’m not suggesting this was the only influence on the decline in oil prices - but I do believe that an important psychological tipping point was reached. In what seemed like a few short weeks, Americans realized that big SUVs could cost them an enormous portion of their weekly paycheck. Filling up that shiny tank suddenly came at the expense of putting food on the table.

Oil peaked in July of 2008; by year end, it had fallen from about $140/barrel to around $40/barrel. The price at the pump went from $4.50/gallon in some areas down to around $1.75/gallon. Now it wasn’t as expensive to fill up the truck.

So was all good in the world again, or did we learn something last summer? Was the impact strong enough to change the rate of purchasing light trucks in America?

Light truck sales began to slide off a cliff in late 2008, just as oil was peaking in July 2008. Since then, we've had heavy incentives in the form of “employee discount pricing” and 0% interest rates for those willing to purchase again - but so far the lesson hasn't been un-learned.

The Lesson at Home

On a much grander scale, people are being caught off base by homes they can't afford. Greed, cheap money, unscrupulous lenders, and personal dishonesty all contributed to the build-up. Along with the bigger house came stainless-steel refrigerators, new sofas, plasma TVs, and barbecues, all were financed with cheap money, available anywhere you looked: 0% down payment, interest-only for 5 years, floating-rate payments - even interest-free balance transfers between credit cards.

These were all wonderful incentives to create the biggest party ever in Consumerland. Parking lots at strip malls and home-improvement centers could have charged a fee, and it still wouldn’t have slowed the crowds.

But eventually, the excess comes to an end. You simply can’t afford that much debt. You have to pay it off, or default at some point. We all knew that; we just all elected to ignore it.