Lauren Templeton and Scott Phillips, coauthors of Investing the Templeton Way, will provide their analysis on John Templeton’s Buena Vista speech on the economic vices and virtues in upcoming posts. Please consider entering our contest on this topic for a chance to win $500.
One of the most interesting exercises we undertook after reviewing Sir John’s 1993 speech on economic vice and virtue was to take the ideals he described in his discussion and look for evidence of them in the recent past and present.
With that in mind, the U.S. economy provides a dynamic panorama where careful observers can view many of the economic vices and virtues that Sir John described in his 1993 speech.
Within the simple time span of the past twenty years, we have witnessed the economic vice of greed, and its component of covetousness as it was manifested through the steady leveraging of both personal and financial sector balance sheets over the course of the 1990s and first decade of the 2000s. The accumulation of debt in an attempt to obtain the image, but not reality, of prosperity continued unabated until the behavior imploded from its own over-indulgences. This phenomenon was aptly illustrated by a household debt to GDP ratio that ascended from 66 percent in 1998 to approximately 100 percent by 2007.
Interestingly, but far from lost on many onlookers, this consumer behavior needed outside assistance in order to come to fruition. In that role, institutional forces including the Federal Reserve incentivized spending over saving for years on end by providing remarkably low interest rates during the early-to-mid 2000s. Low rates provided the bedrock to support acts of greed and covetousness as consumers responded to this economic incentive through accelerated dissaving, conspicuous consumption, and speculation on real estate assets through borrowed money. Through the market mechanism of rising house prices, those who borrowed against these rising values could obtain larger stocks of material goods including cars, furniture, electronics and other luxury items. These lifestyles became a manifestation of greed and covetousness as they would have been unobtainable if they were predicated on personal levels of income.