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Five Things: Culture of Spending Coming to a Close?


"No matter how much you have, you spend like you have a lot more."

1. Culture of Spending Coming to a Close?

Goldman Sachs
(GS), a main beneficiary of AIG (AIG) redirected bailout funds, is now offering loans to employees who may be facing a financial crisis of their own, according to the New York Times.

If this story seems bizarre, perhaps that's because it is, yet again, just one more story of excess leverage combined with overly optimistic income assumptions - you know, just like the excess leverage combined with overly optimistic income assumptions made by all "those people" (the ones who weren't sophisticated enough to work at Goldman Sachs, but collapsed the economy by taking out mortgages they couldn't afford).

According to the Times article, here's what happened. Some Goldman employees who raked it in before the collapse decided to invest in the "elite" Goldman investment funds, long considered one of the main perks of working at the bank. The problem now is that these funds periodically require the employees to add more money, which the employees no longer have because their income has dropped.

As the Times article put it, "Employees in the funds are contractually obligated to meet requests for more capital. Several funds have such capital calls scheduled for April. Employees who fail to make the payments risk losing their jobs, according to a person familiar with the situation."

The irony is that the decisions made by the Goldman employees who now may require loans to stay in the funds are no different than the decisions made by certain mortgage borrowers who overestimated the amount of house they could afford.

"It's a problem with the culture of spending," Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm, told the Times. "No matter how much you have, you spend like you have a lot more."

2. Deflation Remaining In the Picture?

That's the question being considered by this morning's "Ahead of the Tape" column in the Wall Street Journal.

"Deflation -- a persistent price decline that leads to spending delays because, hey, stuff will likely get cheaper -- is no sure thing," The column notes. "But the longer economic weakness drags on, the more slack builds up in the system, keeping a lid on prices." Which is kind of true, but not quite.

It's true, if misunderstood, that the US and much of the world is going through a deflation. Some point to the fact that central banks all over the world are printing massive amounts of money and claiming that fact, in and of itself, is inflationary.

The problem is that the debt buildup was so massive, it will take a long, long time for central banks to catch up. Remember, one must have both the means (credit from the fed and banks) and the motive (the desire to take on more debt) for credit expansion. For over a year now we have had record amounts of the former, but none of the latter. This fact is easy to miss because we are so accustomed to living in a "Culture of Spending." But now things have changed, and in a very profound way. This is a structural shift, not a run-of-the-mill retrenchment during a recession.
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