Thrift Paradox – Is Frugality Hurting Economy?
|January 12, 2009||Posted by Roshawn Watson under Uncategorized|
Frugality is on the rise.
For the first time since 1952, U.S. household debt declined (3rd quarter 2008) according to the Federal Reserve. Unsurprisingly, U.S. consumer spending growth also declined for the first time in 17 years.
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Additionally, U.S. consumers are beginning to save. Economists now expect the 2009 savings rate to rebound to 3% to 5%, or even higher. This would be amongst the sharpest reversals since World War II. In fact, Goldman Sachs predicted the 2009 saving rate could be as high as 6% to 10%.
Many “families hope their new found frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end” (Kelly Evans WSJ).
Is frugality BAD for the economy?
Frugality is generally thought of as good for individuals, families, and the economy. Frugality allows families to accurately assess what they can currently afford and avoid or at least delay purchases that are beyond their means. Frugality also allows families to put aside money for investments and for purchases, which both help fuel economic growth. Although it is unfortunate that it took a down economy to MOTIVATE some of us to be wise with our money, ultimately fiscal responsibility is a good thing.
Nonetheless, everyone becoming frugal simultaneously in an economy largely based on supplying their excesses (expensive cars, McMansions, Jimmy Choo’s, jewelery, 60 inch plasma TVs, fine dining, etc) can hurt businesses. Some even blame frugality for exacerbating the recession, but ultimately frugality is merely the natural response to increased awareness of our fragile economic states.
Frugality is NOT the problem.
The real problem is that some businesses and financial institutions want to continue to fund economic growth on the backs of ill-informed and overstretched consumers. For example, homes in some real estate markets are just beyond the financial reach of typical consumers, yet through aggressive marketing, ignorance, and “sophisticated” business models, buyers were still financed. Although this worked in the short-term, all parties lost once the bubble popped.
It is a bit naive to believe that consumers will indefinitely be able or willing to fund the economic prosperity by staying ridiculously financially over-extended long-term. Still, some suggest…
“Americans, fresh off a decades-long buying spree, are finally saving more and spending less — just as the economy needs their dollars the most” (Kelly Evans WSJ).
There is almost an implicit criticism of consumers, in the tone of such statements, for being unwilling to waste money on discretionary purchases. Such statements are also unbalanced because there is not even an acknowledgement that many businesses are aggressively deleveraging (dumping debt and removing financial risk) as well.
Time like this are where innovation must abound. Sure, it can be rough chasing those consumer dollars, but fixing the business models so that they are not so dependent on consumers spending money that they don’t have for products and purchases they don’t need is key for long-term economic growth.
Hopefully, consumers will continue to be frugal. Financially-conscious consumers will have money in the long-term, and that’s when the real spending, giving, and investing can begin.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.