How long with the lessons of our credit bubble last?

U.S. public radio's Marketplace ran a story today about how the sales of luxury goods are struggling, even with consumers that still have the money to buy them. It's become "unseemly" to buy more than you need, even if it means shopping at Target rather than Bloomingdale's or Nordstrom. The big question is whether this is a temporary shift that will reverse when the current recession ends, or whether this is a generational change that will persist for decades. My gut feeling is that it's the latter, but the only evidence that I can offer is what happened during and after the Great Depression.

Financial hardship causes long memories, and the deeper and more prolonged the hardship, the more entrenched the memories become. My parents both lived through the Depression. In the 1960s and 1970s they refused to do business with Mellon Bank, even though it was the largest bank in Western Pennsylvania, because Mellon had foreclosed on so many homes in the Depression and threw so many families out in the street. They paid cash for everything, financed their retail business out of their own pockets and didn't use trade credit.

Fast forward to this decade and the last. Credit was cheap and widely available, and using debt to leverage, or multiply, the amount of cash that an individual or business had was seen as smart. It worked for a while. It got many people who couldn't otherwise afford homes into homes. It convinced supposed "Masters of the Universe" on Wall Street to take on unbelievable risks. But now, the credit bubble has imploded, just as the Japanese asset value bubble imploded in 1990. Japan still hasn't fully recovered from its "bubble economy". How long will it take the U.S. economy to recover?

I think that it wll take long enough that the lessons of dependence on credit will be burned into a generation of consumers and business owners. Consumers will scale back their purchases to focus on items that they need and can afford. Businesses will again focus on cash flow and profitability, rather than growth and leverage. The quality of earnings, rather than their absolute size or growth, will become the most important factor. Personal savings will eventually swing upward as consumers work off their debt burdens.

I'm going through my own version of a credit bubble implosion, one that, frankly, I may not survive. If I do, I will be as changed as my parents were. I am not the man I was a few years or even a few months ago, but yet my lessons pale next to those of families who, through no fault of their own, have lost their homes and have no place to go. There is no longer any such thing as "good credit." Credit is a necessary evil in some cases, but it is an evil, and it should be avoided.