Tuesday, November 25, 2008

Bursting of the consumption bubble

This column is subsequent to two radio interviews broadcasted today, Tuesday November 25 2008:

  • the first with host Christiane Charette on Radio-Canada (95.1 FM),
  • the second with host Michel Gailloux on Radio Ville-Marie (91.3 FM).

The rise of luxury leads to excess both from the consumer and the producer. This is the central theme of «Consommation et luxe», a book published in November 2007. My analysis helps understand that buyers’ and sellers’ excessive behaviour is in fact partly responsible for the economic and financial crisis which started in the summer of 2007.

Various bubbles have developed over the last decades and they all ultimately erupted: technology, real estate, stock market ... we must now talk of a consumption bubble.

Hyperconsumption, a phenomenon which appear at the turn of the 20th century, is characterized by:

  • consumption focused more on pleasure than on image,
  • an increase in the quantity of goods and services purchased,
  • an escalation of luxury, «luxurization» in some way of goods and services offered.

This rise of luxury is easily explained by considering the motivations and behaviour of the consumer and producer.

From the consumer’s standpoint, it should be noted that consumption itself is inflationary, not the economic sense, but in the sense of an ever-increasing purchases, day after day, year after year. Abraham Maslow rightly said: «Man is practically always desiring something».

Luxury only exacerbates this impulse: Man always desires something… better. This translates into an inflation of features in goods and services. Take a car for example: if I just bought a car with power windows, an accessory my previous car was lacking, this feature is a form of luxury for me. However, the luxury effect is short-lived; when I buy my next car, power windows have become my «standard» and I will need to add another accessory or upgrade to a higher end car to satisfy my desire for luxury.

While the consumer wants to buy luxury goods and services, the producer is also enticed to sell such products, because the profit margin on those is much greater than on mid or low range products. Furthermore, investors’ demands ever hungrier for profits force companies to follow this path.

It’s an illusive path, as the main car manufacturers in North America can well testify, having originally built their respective empires selling affordable products to the middle class. In this industry, a financial ploy, leasing, has allowed dealers to retail, for some time, high end vehicles to people whose income level was insufficient to purchase this type of good. This business model was doomed to failure.

Current economic and financial conditions favour the bursting of the consumption bubble. Having suffered financial losses, perhaps lost his job, deprived of savings, no longer having access to easy credit and seeing payment options for luxury goods disappear (i.e. leasing), the consumer must curb his consumption.

This is true in all social classes. The difference between the richest and poorest is that the latter are even more deprived to the extent that some can not even buy the bare minimum.

Where is consumption heading in the coming months and years? I’ll answer this question in future columns.

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