Wednesday, March 25, 2009

Don't get guilted into overspending now!

Conflicting signals are being sent by the Mainstream Media on the subject of thrift and frugality in the current economic crisis. Take for example Newsweek, which is one I happen to read. One week it carried had a story by a fellow whose parents were so frugal that they could have written the Tightwad Gazette:

In today's cratering economy, my parents are looking pretty smart all of a sudden. President Obama talks a lot about personal sacrifice, and we all need to look for ways to cut costs these days. Maybe he ought to consider Bill and Joyce Tuttle as the nation's first thrift czars, because when it comes to pinching pennies and saving for the future, my parents are extreme.
They dry their clothes outside, don't have cable TV and heat their (self-built) home with wood they chopped. Although the author acknowledges that the model is a tough one to replicate, the conclusion is admiring:

But there are still valuable lessons to be gleaned from their example, which boils down to this: the people who have been living the thrifty life all along, doing the right thing—crazy stuff like buying houses they can afford and saving up money for things they want to buy—are the smart ones now. And they'll be the ones who adjust most easily to a leaner time.
and the very next week there was a story whose title says it all: Stop Saving Now!

For our $14 trillion economy to recover and thrive, hoarders must open their wallets and become consumers, and businesses must once again be willing to roll the dice. Nobody is advocating a return to the debt-fueled days of 4,000-square-foot second homes, $1,000 handbags and $6 specialty coffees. But in our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend. Otherwise we fall into what economist John Maynard Keynes called the "paradox of thrift." If everyone saves during a slack period, economic activity will decrease, thus making everyone poorer. We also need to start investing again—not necessarily in the stock of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovery and development of new technologies.
The copious qualifiers notwithstanding, it is hard to believe that he's not talking about designer handbags and speciality coffee. After all, if one still has a job they're not likely not to be spending on food and other daily necessities - albeit perhaps at a lower level than before. What has suffered in this economy is precisely the credit-fueled consumerism of large-screen TVs and stainless steel kitchen appliances.

If you really want to see what the problem is, check out this posting from Nate Silver:

Per-family household debt increased by about 130% in real dollars between 1989 and 2007, from roughly $42,000 per family in 1989 to $97,000 eighteen years later. Most of that increase has come during the past six or seven years -- household debt increased by 52% between 2001 and 2007 alone.


All of his wasn't that much of a problem so long as the value of the housing stock was appreciating at 10 or 15% per year, keeping pace with the additional debt that households were assuming. But of course, it stopped doing so about 2-3 years ago. Translation: look out below. When people talk about the destruction of the household balance sheet, this is what they're referring to (or at least what they ought to be referring to).
In other words, the paradox of thrift notwithstanding, the growth in the economy and the reliance of it on consumer spending was built on an unsustainable bubble in the value of one particular asset - housing. The decline in those values -and the resultant tightening of consumer credit - means we couldn't return that economy right now even if we wanted to.

Which we shouldn't. It bears repeating that building an economy on handbags and Starbucks and large screen TVs doesn't do a single darn thing "to build skills, to create the new companies that are so vital to growth, and to fund the discovery and development of new technologies." That kind of activity is above the paygrade of most consumers anyway. For now, the best thing that we (the consumers) can do is to pay down debt, increase savings, and continue to sensibly buy those things we need to our daily lives - not foregoing them, but not buying more (in quantity or in designer label "quality") than we need.

That's the way to get our own "toxic assets" off our balance sheets. When, in the future, the economy and the credit markets return to some measure of normalcy, we will then be in a much better position to invest and spend planfully and wisely than we will be if we allow ourselves to be guilted into over-spending now.

So go ahead, hang your clothes outside. Drive your car till it dies. Pay cash for what you buy. You have my permission.

No comments: