There is much talk these days about the American Consumer's new found frugality. Turn on the news, open a newspaper or browse the money sites online and everyone is saying that frugal is now fashionable and that over spending is "so 2007". For example, in this month's edition of Money Magazine the Editor's Note includes the following:
"...For one, the American consumer will no longer support global growth on his debt burdened shoulders..."
I don't buy it.
True, folks are spending less and saving more these days - the savings rate hit 5.7% in April according to the Federal Reserve Bank of St. Louis. However, looking at the data more carefully shows the personal savings rate almost always spikes in recessions, only to fall back down once the economy recovers. What makes us think that this time will be any different? Yes, this time the spike in the personal savings rate appears sharper than usual. However, I believe that this sharper spike is a response to what is turning out to be a very deep recession which is stoking people's justified fears about losing their jobs.
Once the economy recovers, I am willing to bet our compatriots will fall back into their free wheeling, crazy spending ways.
This leads me to another point. Have you noticed how easy it is for people to assume that things are permanent? People's ability and willingness to adjust their baseline and to assume that whatever is now happening is the new reality which will last forever is asstounding to me. When the stock market or real estate prices go up, people assume that the good times are here to stay - "it's a new economy". When the markets decline, people flee for the hill with shouts of "the sky is falling" echoing through the wilderness. It is a flaw of human psychology - our memories are short and our tendency to extrapolate is over developed.
Recognizing this, I try to avoid thinking too highly of my own abilities to spot a pattern, and try to make as few predictions as I can (especially about the future, to borrow a phrase).
Here are a few other posts that deal with the topic of frugality:
Trent of a Simple Money explained that cutting spending is not the same as saving. You also need to make sure the money is not wasted on some other unnecessary activity.
Frugal Dad makes the point that eating out is not always a waste of money.
Blunt Money has a post about spending $900 in unplanned expenses this month. Nothing wrong with spending the cash if you have it. Just make sure you don't rob your future self of a decent standard of living to pay for a higher standard of living than you can afford today.
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