The culture of saving
Are Americans becoming more thrifty? Personal savings rates are up, the government statistics tell us. This fact has engendered a wide-ranging debate. Is this just a short-term deviation from America’s obsession with spending, or is it a permanent change?
I believe it’s a permanent change, but not for the reasons you might think.
No, the financial crisis and recession have not administered some type of shock treatment on the American psyche. Rather, it’s my view that the crisis has administered shock treatment on the financial institutions that gave rise to a high-debt culture—a culture of high credit card and installment balances, no money down, minimum monthly payments, and negligible savings.
Here’s my hypothesis: The steady decline in American savings rates over the past quarter-century was largely due to growing access to easy credit. It was a structural or institutional shift, not a behavioral one. Americans in the 1950s, who saved at a much higher rate than Americans today, were not somehow morally superior in their fortitude or self-discipline. Rather (in my view) they just couldn’t say “charge it” every time a new consumer product caught their eyes.
The institutional impediments to spending were strong. Credit cards were nonexistent. When it came to borrowing to buy a new car, it was a short-term installment loan and required a hefty down payment. And when it came to buying a home, there was no PMI—it was 20% down, in cash. (And who remembers layaway?)
Now, with tightening credit standards, Americans actually have to save money to buy things—they need cash to buy a car or new appliances or a home. Hence the rise in savings. From this point of view, many of the recent complaints about availability of credit have a silver lining. They will encourage those Americans who are overreliant on debt to consider saving for the future, rather than borrowing from it.
Recently, I heard a radio interview with an author who complained about rapacious credit card practices. He talked about credit limits being sliced and minimum payments raised sharply. There were a number of legitimate points he raised.
And yet I couldn’t help thinking that maybe we want and need debt and borrowing to have a “bad rap.” Longer-term institutional restrictions on credit may be exactly what America’s meager savings rate might need. They will contribute to a savings culture—a culture where saving, not debt financing, is the automatic response to every consumer impulse.
Now if we can just get the US Congress to follow suit – even just a little bit.
An alternative view would be that there has been a secular generational shift. The new generation in power believe in savings rather than borrowing. These 20 year shifts are consistent with history and explain a lot about the economy!
Am skeptical. But there may be a way to figure this out. The question becomes — do consumers have, on a “long-term” average, an increasing amount money in the bank? (The word “increasing” is important here). Or, have they just been saving up a bolus (e.g. $10,000) so they can spend in chunks (for cars, refrigerators, homes, trips etc) but stay out of debt caused by borrowing. In this second scenario the consumers will build up their e.g. $10K “cash stash” that they will maintain at the average value of $10K. While they can avoid “debt financing” they won’t be saving any more than before. As soon as their stash exceeds their target level (e.g. $12000) it burns a hole in their pocket and they buy a $4000 plasma TV (ATV, trip to Disney-World, etc) and thus bring the shash down to below their “target level” (e.g. $8000). Thus the variation (+2000, -2000) will be around a positive mean value (+10,000) rather than around zero (in the case of debt financing). Overall the economy will be in exactly the same state as before, with some minor differences related to the increased deposits that the banks are carrying, and the consumers’ avoidance of late fees etc. So: my hypothesis is that this “savings” that economists have observed is just a temporary event related to the accumulation of “cash stashes”.
No doubt tight credit will boost savings rates. And thats not all a bad thing.
I also know there is a lot of fear in the work place that has a big impact on the willingness of those still working to spend as freely as before.
You can date the marked decline in savings rates to financial deregulation that began under Reagan and culminated under Clinton. Much of the fall in the savings rate has to do with stagnant wage growth. Wage growth in the last 10 years has been negligible.
Never have been a big spender – - – never will. Always have been a careful spender – - – and a saver. Its just good sense.
Steve,
I appreciate your insight into our current “zeitgeist” in delineating how many American financial institutions and their customers (us!) have behaved regarding their (our) spending and consumptive behaviors. No doubt the easing of monetary credit for our everyday neighbor and ourselves urged and psychologically coerced us into wanting it all…now! Yet, “gamblers and spenders” from all layers of our culture did not just happenstance the last twenty years either. Indeed, our outlandish financial behavior, as recently witnessed within the last twenty years, continues to rhyme and/or repeate itself from the buying of tulips and tech dot-coms to the credit default swaps. I think Mark Twain (who lost fortunes himself) and Will Rogers (another great American humorist) are credited with the following maxim: “The past may not repeat itself…but it sure does rhyme!”.
Vanguard quips it best: “The performance data shown represent past performance, which is not a guarantee of future results.” Simply an analogous cousin alongside Vanguard’s exhortation might read: “Past human behavior is not a guarantee of future human behavior.” Yet, much rhyming behaviors of yesteryear and yesterday shall parallel our human behaviors in the future.
Great post…I always enjoy your financial market insights and personal musings on the condition human…
We all need to be living within our means. America needed a wake up call and this recession should be the one. Stop using credit. When interest rates on credit cards are at 25% it is not a convenience but highway robbery. Let us all teach the banking industry a lesson and become our own bank. Money not spent is money earned. Be happy living a simple life without all so called necessities. We will be richer and save the environment as well.
As for jobs – they have gone to China. Let us stop buying products from China and teach corporations a lesson too. As long as jobs are not there, there is no point in blaming the government. It the corporations that have destroyed the American dream. Also the global economy proponents who bought into the corporate sales pitch and drained the economy of a stable fuel of blue collar jobs.
According to the theory of lowest wages get the jobs Americans will be employed when wages come down to the level of those in India and China. So, wake up America and follow the Gandhian principle – Be American buy American, create American. Stop China now, or freedom will be lost forever. Follow Google’s lead and stand up to China.
Want to really stimulate savings? Remove or substantially further reduce the tax on capital gains, interest and dividends and don’t threaten to raise them again. Right now, the more you save, the more you lose or will shortly lose to the government (federal, state and local). What’s the incentive?
Don’t expect the mantra “spend a little – save a little – invest a little” to become a social norm anytime soon. Government tax policy does not reward saving and investment. Consumerism and ostentatious display are ingrained social behaviors. IMO, the current bolus in the personal savings rate simply represents pent-up demand. That’s fine by me, provided there is financial policy that regulates debt to control risk at a prudent level by providing”…institutional impediments to spending…”. That would allow individuals to do what they wish with their money and create an economic social balance between spenders and savers.
What does the national personal savings rate consist of? I don’t know where I would fit in. I have nothing in the bank.I save 21% of my wife’s and my pay in a 401-k.I owe nothing on my home or cars.My additional savings are in land and land improvements. With home equity loans available by writing a check I see no need for a bank savings that pays nothing.I think maybe statisticaly I am a non-saver but in reality I save about 30% of my income.
How do we encourage the Federal Government to be fiscally responsible so that we may save without the
concern of rampant inflation ?
Debt and loans were a “bad rap” until companies realized there was money to be made in credit. They worked decades to chip away at the negative perceptions of buying before having the cash available. And many industries continue this practice of lobbying to change laws, and advertising to persuade consumers, to create an atmosphere that favors the transfer of money to them, whether it benefits citizens, or the larger culture. Even now, financial institutions are loath to perform loan modifications since they make more money on fees from distressed homeowners than they would make on the modifications. Another example: the finance industry works hard to make “rapid-refunds” at tax time seem easy, convenient, ordinary, and desirable, when they are better used in desperate situations as a measure of last resort. “What makes fast money” will ultimately determine our next culture (assuming it changes,) and whatever it is, don’t expect it to be a saving culture, because that doesn’t make money for corporations.
I’ve always told my kids that if they don’t have the money in the bank to pay for something then they can’t afford it. The only things that I believe justify borrowing are a house or a business. Anything else should always be bought with cash. I guess that is what this article is saying.
I think this is all wet. People will not embrace a permanent culture of saving if savings are not rewarded. Saving for short term purchase, sure. Socking away tens of thousands of dollars for little interest in liquid investment instruments? Unrewarding in more ways than one.
Your math is incorrect. If people are saving in order to later spend, then in the aggregate the saving rate will remain zero. Example: 900 people are saving $100 / month for 9 months to buy a $900 item: addition to saving = $90,000 per month. 100 people are withdrawing $900 they saved up over the previous 9 months: subtraction from saving = $90,000 per month. On net, saving = 0. Only if people are saving *and not subsequently spending* will the saving rate go up.
“What does the national personal savings rate consist of?” It is the difference between disposable income (essentially, income minus taxes) and consumption. If you are saving 21% of pay in a 401-K, that’s saving. If you are paying down debt, that’s saving. If you are putting $ in a coin bank, that’s saving. If you are putting $ in a savings or money market account, that’s saving. If your existing assets are increasing in value, that’s not saving: it’s an increase in the value of your wealth, but is not counted as a change in either disposable income nor consumption.
I think our government has to understand that debt is not good for anybody,even not for the country is just like house budgets.We all have to understand about savings.Do not buy anything you do not need
Our government has to understand and follow the basic rules and regulations.If they do not follow then kick them out of office.One more thing we have to cutt down on our defense and let somebody else to
take care of the world problems.We are not anymore number one in the world.Thamk you.
Live well, but don’t pay interest to the banks or card companies. The “cash stash” works. Make car payment to your savings, (mean time drive the old car) and when you have enough buy the new car. You get interest payments both ways — sayings and no loan. It works.
Many, if not most of us, are the gullible victims of high pressure and ofttimes deceptive advertising. Unless I step back and ask myself,”Do I need it? I’d like it but do I really need it?”, I can fall into the trap. Is it to keep up with the Joneses? Yes, we do submit to impulse but controlling it is a sign of self-discipline and ultimately rewarding.
RIGht On!
The financial industry has lost my trust. (Vanguard is an exception). Without regulations, many financiers continue to slice and dice statistics to make themselves very well-off at our expense. Moving investments to just the basic INDEX funds looks better and better. Thank you, Vanguard for creating a transparent chart for us to easily track how much we put in and when and where it stands now.
“Availability of easy credit” is not necessary to have a savings rate of zero. Credit is only necessary to go negative. Yes, credit allowed us to go negative on average over the last several years. But the lack of credit in the future does not mean people will save more money. Instead, people inclined to go negative in 2005 will flat-line at zero in the future. Fewer people will be going negative. Their savings will still be zero. The people that were saving in 2005 will likely save at the same rate as before. The average savings rate will go up, but we will likely have just as many people living paycheck to paycheck. The average will change only because fewer people will be in negative territory. Increased savings rates will not come from restricted credit. Increased savings rates will only come when wages rise to meet and keep pace with the costs of life’s needs, and more people learn to correctly distinguish needs from wants.
Saving rates can be high even with easy access to credit. No one is forcing you to buy that Margaritaville.
You can have a close to 0 saving rate (but not negative) without any access to credit.
Saving rates can be affected by credit availability but neither easy credit or credit unavailability guarantees a high or low saving rate.
Thus ultimately it’s the consumers and their life experiences and not the institutions that play out this saving rate.
This debunks this entire article
But where are those of us who are ‘savers’, as I have been all my life, to place our money where it may earn a decent return and not be penalized brutally with taxation. Savers today are not treated with the respect they deserve. How can banks record record profits and then pay less than .5% on large savings accounts??!! I, for one, have just about given up and may well join the throngs of people who live on the edge of bankruptcy!
Amen, someone finally has said it, stop the “buy now and pay later” attitude that has gripped this country for the last thirty years. Well people, “the later ” time has arrived and most people are certainly paying for it. The blame lays squarely on the Congress of the United States for following this policy for years and pushing our financial institutions to extend credit to people that had no hope of ever paying these flimfam mortgages. Extending credit without any credible evidence of income to solely encourage home ownership for the masses may have been a nobel goal, but we are all paying for it, even those that were responsible lenders, but now have lost value in their homes, face rising real estate taxes and very soon will see huge tax increases (some very well hidden in the beginning). Remember what these people did to our beloved country where you step into the voting booth in November! Get mad and get even.
I was a Depression kid. My father was a printer, and his old pay stubs I found showed many weeks when he worked 20 0r 25 hours a week. I’ve been financially conservative ever since…never bought on time, pay cash (or use a credit card and pay in full when the bill comes in), count on investments in mutual funds to provide funds when needed in the future.
Our three offspring picked up some of this attitude, but still spend more than they make on occasion. With today’s sour economy, I think they’re starting to understand why we’re penny pinchers.
Credit card companies, mortgage lenders, auto financial lenders, and all other merchants who advertised to the public to “buy now,pay later” did an enormous disservice to the America. It generated the idea that you can have it all now, with the false idea that there was no day or reckoning to worry about.
Unfortunately, that no-thinking process took a hold in Washington among the politicians, whose only worry seemed to be to be re-elected, gain power and seniority, and get rights tot he best unfunded pension system in the country.
The result is that the non-savers got hit hard when the recession hit. Overextended, deep in debt, and no savings account to keep them afloat. Compare that to Japan, where people have always saved and managed much better through their long recession and deflation.
What we can expect from our irresponsible government, the so called fiscally responsible Republican administrations (Reagan, Bush I and Bush II), who all advocated and actually reduced revenues by cutting taxes, while spending more than the income each year. Only spendthrift Democrat Clinton managed a surplus.
We can expect that despite all protestations and the goal of the FED to keep inflation low, they will eventually try to inflate their way out of debt.
The Swiss Franc was worth $0.27 in 1978, recently it has been almost at par with the dollar. The most responsible fiscal government is Canada and their currency has appreciated, and they have long had a budget surplus.
Yes, and the dear ol’ FED gives every saver a haircut on interest payments every day of the week. Since Reagen savings has been a poor place for cash.
I have always been a “saver.” I never trusted home equity loans or credit cards and have always tried to stay out of debt. When I had a home mortgage, I prepaid extra amounts to cut my 30 year mortgage to 20 years. I should be sitting pretty, right? The sad truth is I also became a “gambler.” The returns in Vanguard’s bond funds seemed anemic to me, so I began to move money into closed end funds that offered much higher dividends. After the 2008 collapse those closed end funds that I had paid $19 a share for dropped to $10 and the payouts went from 15 cents a share to 9 cents. Yes, I feel stupid. All that savings discipline for what? Okay, I learned my lesson. What’s important is not how much you save, but how much you keep! No more “hitting for the bleachers” for me.
My “culture of saving” is really just self preservation and survival in an era of 15% unemployment, stagnant wages, and two kids in college. My money market and cd returns are paltry, yet the bank can still gouge credit card users and offer mortgages at 5%, and it’s all gravy for them. My first mortgage was 12 3/4% adjustable, but at least they paid 10% on my money market account. Try getting that now! I’ve been with Vanguard for over 25 years in IRA’s and 401k’s and while they’ve never set the financial world on fire, the returns have been consistent, and the advice never deviates from the dollar cost averaging mantra.
I’ve come to realize that time is the most valuable commodity in life and I’ve quit wasting it worrying about my portfolio. Just like the sun, it goes up and down, but has risen steadily for over a quarter of a century. My mantra has been to live beneath my means, debt free, and to purchase most things used for a fraction of their original cost. Living like a pauper has given me a pretty good lifestyle.
steve i couldn’t agree more . as the saying goes cash is king. by the way i’am 59 please keep up the good work thanks
A very interesting post. I’m not so sure I agree with many of the comments, however. I know why I save, and the recent free fall of jobs and stock prices has only reenforced it. I save because I don’t like the stress of financial insecurity. I’ve been poor in the past and it isn’t something I would care to repeat. Having savings is security against the next bad news that is coming down the road. I’m a pessimist at heart. I don’t think the economy is going to improve over the next few years and when it does, it will be slowly. So I save to insulate myself. Consumerism has nothing to do with it. As far as taxes are concerned I would like the roads paved on occasion so I don’t consider taxes evil. I would rather pay taxes than high interest on a credit card.
Again, an interesting post.
Regardless of the psychological reasons, moving back to more savings (which is not just savings accounts, but also includes stock and bond portfolios), the important thing is that we move back to a society that saves about 10% of income. For more than 15 years, I have warned about a builiding credit bubble that started with credit card debt (at absurd interest rates and no longer tax deductible), added home equity loans (once called second mortgages), and then moved into mortgage refis where the principal amount was increased (refis were historically to get a lower interest rate without increasing principal) and the cash received from the refi was spent on expensive vacations, plasma TVs, etc. No consumer was ever forced to take out any of these borrowings, and those who blame “rapacious lenders” are attempting to totally absolve borrowers of a quality that most of us still refer to as “personal responsibility”. It will take a very long time to lower the borrowing levels of our society as a whole, which will surely make any substantive recovery from this Great Recession a long drawn out process.
I fear the lending institutions greed will re-emerge, enticing consumers to borrow and to re-employ their plastic in ever-increasing orgies of “just say,’charge it’.” The market place is inveterately geared to a buy now model. Quarterly earnings are so important to stock prices and confidence in the financial markets. Clearly, stronger regulation is needed on the whole panoply of lending practices. The autumn of 2008 could happen again, and again, and again.
The last comment raises an interesting point. Has saving been redefined rather than disappeared? With changes in pensions, in investment strategies, and so forth, saving may take a different form than in the past (an IRA rather than a passbook account, for example). Perhaps Steve could address this issue.
With respect to an earlier post, calling for tax cuts: there is at best a negative correlation between tax rates and saving rates. US savings rates were very high in the 1950s, when capital gains taxes were also very high. It is simplistic at best to attribute declining savings to tax rates on capital gains, dividend, and interest, particularly because all are currently very low in historical terms.
Your message needs to be heard in Washington. Thank you.
You should also consider the concurrent activity of the Dave Ramsey Effect: Dave Ramsey’s talk show on the radio and TV, and at seminars, and through book sales, and now seminars held at churches across the country, affects several million people every week. “Debt is dumb” is the theme, along with “Cash is King.” The effect of his efforts to get people off the debt highway, at the same time the Recession is squeezing them, is very salutary in the long run, but might actually prolong the recession in the short run.
I can remember hearing 40 years ago that Sears discovered they made more money from revolving charge accounts than the actual mark-up on merchandise sold. Easy credit seemed like a win-win-win situation. Individuals,corporations and political entities could buy now and pay later, financial institutions made money servicing, selling & trading debt and merchants found it easier and often more profiable to sell on credit. My parents (the depression generation) did not have the habit of buying on credit and were regular savers and conservative investors. I wonder if the current recession is going simply shake out some excess leverage (especially in housing) or
result in a more fundamental change in our attitude towards credit and saving.
I agree with the premise that tighter credit leads to more savings and more responsible spending. However, I am frustrated with the lack of recognition of the underlying issue behind America’s rapacious use of credit. Incomes for most Americans began stagnating in the 1980′s. In general, worker productivity increased but the benefits were not shared by the average worker. The typical worker today earns less than they did in the 1990′s.
Average folks responded to a decrease in their real income by relying on easy credit. The easy credit is gone but the underlying problem persists. For many years I supported myself and my two daughters on an income nearly identical to the medium family income. I know exactly how difficult this is. Upper middle class writers might be glib about the forced virtue of tighter credit, but there are deeper economic and social issue we would all do well to acknowledge and address.
If you have a low income and/or your salary has been frozen during the last 10 years, how can you save ?
I suspect that the demographics of the savers corresponds to the 10% high income of the U.S. population, and in 2010 is only the 1%, with bonuses included.
Good article. We knew it could not go on forever. I think that generally people are happier when they are required to “plan” first before they purchase things.
I agree that financial instutions are at the root of this situation. However, one aspect of it that always gets missed is the sharp increase in home equity loans after Congress took away the consumer credit interest deductions on taxes. Yes, once upon a time – until the early ’80s as I recall – not only was mortgage interest deductible, but CC and other loan interest was deductible as well. It was phased out over a 4 – 5 year period and that’s when the banks really began pushing home equity loans. (Hey, buy that SUV and still deduct the interest!) Smart folks (especially those who remembered the Great Depression) would caution against putting the roof over your head at risk, but using your house as an ATM soon became the norm anyway. I suspect that had Congress not killed the consumer credit deduction, much of this current crisis never would have happened.
At the very grassroots level Americans need to change their ideology that every”thing” is disposable. Items are purchased for consumption that is very immediate and then thrown away to be replaced in the near future. This results in higher consumpion of goods but less money available to plan for the future. The Baby Boomers may be the last of the savers until the culture of saving is re-instituted. The green movement will help this along, but the impact will be long and slow, albeight necessary.
This is in my opinion a temporary situation driven by fear. The Pavlovian responses trained into us thru the technology of TV advertising will not go away. McD sponsors Sesame St, and even PBS has sponsors now.
In addition our net savings rate is down since Washington is spending way faster than we can ever save.
This is an interesting article and worth considering. I believe it all boils down to people controlling their spending/purchasing habits, whether with cash or credit. And if they don’t know the arrangement they are signing on to, then they can (will!) suffer the consequences. There certainly are predatory corporate practices and the deck is stacked against people, but people MUST their common sense to understand what they are getting into.
Leadership should lead and as long as we, Americans, are content to allow the Congress to spend and borrow and mortgage our future the financial situation will only continue to deteriorate. Those who serve must be held accountable for the choices that they make. We have grown complacent as the same people do the same things over and over again. We stand by as the government swells to ghastly proportions and we are silent as the self-serving promise makers continue to blow smoke. We need doers… not talkers. Wake up America!
I once saw two grandchildren showing their new electronic gadgets to their grandparents and bragging that their parents had taught them the wisdom of buying it now on a 90-day same-as-cash deal: “We get it now, but we don’t have to pay for it for 3 months. The store pays our interest.” This episode taught me that there may indeed be a generational shift in thinking about credit. What happened to parents teaching their children self-discipline to earn, sacrifice, and save in order to get what they want?
This is definitely an interesting take on the savings picture and I agree w/ your points. Economies in most of Asia are still largely a “cash” society and you see incredibly high savings rates there. The dirty truth is the US economy needs us to SPEND not save to power GDP growth. Massive government spending and deficits is not enough w/o consumer spending to power GDP growth. So no matter how much the officials slap businesses on the wrist for extending irresponsible credit and getting us into this financial crisis, etc, the reality is the US NEEDS credit to grow so that we can grow as a nation. We cannot and have not for decades been able to grow on productivity alone. Massive budget deficits and shrinking of credit will only hurt us more in the long term.
I really think there are some on-target posts here. It sure is a dilema as the government knows Americans need to save more but the government wants you to spend more to help move the economy along so they have created incentives to do just that. I really think everything has gotten turned upside down as the people who have been fiscally responsible are the ones paying the price and those who have lived beyond thier means are just walking away. I certainly don’t regret my position but it is disheartening to see all backwards processes happening. These are all lessons learned in the 30′s and now they will have to be relearned all over again unless the government can manage to kick the can down the road for another generation.
An unusual yet logcial view about reasons for Americans saving more because credit access
being more difficult…hopefully it is a long term happening. Many reason why this wd be healthy
for the purse and the body…. less eatiing out, which is a killer…..perhaps more home gardens…
less shopping out of boredom…more interest in alternative fuels and vehicles…and if less worry over high debt then better sleep. All of these small benefits create a more peaceful way of life.
I find it interesting that a regular working girl like me managed to put money into a savings account despite the fact that my last full year’s pay was less than $36,000 — I worked full time as a reporter and part time in a doctor’s office and in my spare time wrote (and had published) four non-fiction books. I am now living on $726 a month from Social Security and my savings as well as what I can earn. I saved money even though there was absolutely no incentive by banks to do so by paying an interest rate above inflation; I also paid into a SARSEP plan at work that my employer did not match. What I have I earned, but if I had not stayed home to raise four children while my husband worked, and if I could have earned my BA with honors earlier (didn’t take out any loans and did it over ten years) then I could have earned more and perhaps not be living on the edge. Saving is good, education is better, equal pay should be mandatory.
I have have a beef that makes me feel like a fool for scrimping and saving over the years. For years, my wife and I (who have always had meager incomes)have driven 10 yr old cars and live in the same house we paid off 10 yrs after we were married. (I was 26 and she 22 when we married.) We have now lived here 30 years. Our friends are always asking why we have not “traded up” houses as far as another larger, swankier home as our incomes have risen over the years. We have always lived below our means and have always invested in the stock market via mutual funds and individual stocks. Because we have accumulated some notable wealth due to our frugal spending and depriving ourselves of the new cars, vacations, etc., we cannot get any financial aid for our son’s university education. Reason: because his mom and dad managed to save a little money over the years. Those same parents who have spent money like drunken sailors quailify for financial aid because guess what? They have no net worth!!! So, my wife and I are penalized because we saved…aren’t we great candidates for Village Idiot?!!!
The commenter with his money in land seems to have a good idea on how to save. There is really no incentive to save now, savings account rate for my son’s account are at 0.1% at Wells Fargo and our credit union isn’t much better. CDs rates are really low, 0.9% for a $25K 12 month and less for less money and time at the credit union. It’s ridiculous.
Your analysis as to what is driving the savings is right on the mark
That’s fine in the short term, but the sellers of goods will lobby for easy credit as soon as this crisis is past. Congress, always listening to the special interests, will give in again. As usual, our problems are caused by the government, not resolved by them.
Credit cards did exist in the 1950s. The cards were purchased and used for primarily for convenience, not to borrow money. Many, if not most, people who used the cards then and are still alive today pay off their debts monthly and get rebates. The others pay dearly for their “free” cards. Some use the abominable “debit” cards, and subject themselves to a modern form of usury.
Years ago I suggested to a Vanguard telephone answerer that your company offer checking accounts (without the $250 minimum limit) and issue credit cards. I still think it would be better for both Vanguard and its customers than dealing with banks. Banks have gone into your business (among others they shouldn’t have), why can’t yours enter their’s?
I see from some of the other comments that many people believe that when it comes to government spending habits, Congress is the one that has to be reigned in. It is rare, however, when the Congress actually appropriates more money than the President has requested in his budget.
For all Ronald Reagans complaints about how we spent to much in the Congress (where I was serving on the staff of the House Committee on the Budget during his entire Presidency), we actually cut his request every year, and we had his Cabinet Members calling on us in protest of our cuts. And remember, all of the big entitlements originated with the President, including that budget blockbuster, Bush’s RX drug program. Earmarks? Yes Congress is guilty, but makes room for them with other cuts. Sometimes eliminating more worthy items, but still they are not adding to the spending with the earmakrs.
Just thought you might want to know.
Many of us did a poor job of teaching our children, who are now young to middle -aged adults, to save more, spend less and not use their credit cards except for special purchases or emergencies. The whole concept of allowing someone to pay 0 down for a home loan was ludicrous and is part of what got us into this mess in the first place. If a person(s) could not pay anything down on a home, how could they pay monthly notes, moving expenses, utilities, cable, phone, car notes and all the rest? Banks were greedy and did a terrible disservice to home purchasers who really were not financially qualified to even think of a mortgage, much less take one on.
By all means we need to save more – the government will need to feed deficits from somewhere, right? Let’s just hope they don’t find a way to raid our 401ks.
A deeper issue not discussed above is the fact that wages for most people in the United States, when allowing for inflation, remained flat from the 1970s forward. This is basically the same reason why women entered the workforce more extensively in that period — they had to. It follows that the availability of more extensive credit arrangements to purchase necessities and obtain needed services, with certain obvious exceptions of luxury goods, was taken up as one way people hoped to make up for the freeze in wages.
I agree that Americans probably are not saving more because they finally get it. But I don’t necessarily think it’s all about the availability of credit either. Quite frankly, I think Americans are scared. They don’t want to put money in the market because it could be gone tomorrow.
This is an interesting hypothesis. Do you know of any academic work that is attempting to tease out the various factors that contributed to the low savings rate in the late-20th century U.S. and the recent turn-around? I would be interested in learning more.
I remember watching my dad in the 70′s cut up a bunch of credit cards. The great depression was brought on by easy credit ,this one’s no different . And I would differ from the author to this extent-The secret untold truth amidst all this govt. handwringing,something they never like to say in front of the cameras is that we, the people brought it on ourselves.
People always complain about taxes. I wonder how many people think about the hidden “tax” of impatience. The best example is impatiently buying things on credit so that all you can afford is minimum monthly payments on your card debt. All future purchases on credit are “taxed” at the card rate. This could be 20% or more. By patiently saving for purchases and then buying or paying off your credit debt each month the ‘impatience tax can be completely eliminated. As Ben Franklin
famously said “A penny saved is a penny earned”.
I think workers are really worried about their retirement after the financial crisis we have been in. Because of decreased retirement savings, they figure they have to work longer before they can retire, so putting more away toward their retirement makes more sense in order to be able to retire.
Those of us who grew up in the 1930s have always expected a return of hard times; we were not successful at teaching it to our children.
Amen! People seem to feel it is their priviledge to have any consumer product that they want at the moment..without having the “real” money to afford it. Things used to have much more signifance when you had to work and save to have the things that you wanted! thanks you for your observations.
partially correct. but adults of the 1950′s were children of the great depression,and were scarred by that experience. they were different than today consumers.
We will become a nation of savers when governmental policies change to make saving attractive. Tax policy determines many of my investment decisions. Risk taking, which is essential for our economy, only makes sense if federal tax policy treats gains from risk taking favorably. The current tax policies RE interest and dividends make investing to capture such income unattractive. The long term impact of these policies tends to make investing less attractive. This is exactly the wrong message our govt. sends to us. Perhaps electing people who have a stronger understanding of Econ. 101 might help.
The points made about the reason for saving do make sense. However, I think the conclusion that current saving trend as reinforced by the institutional restriction will lead to a culture of saving is premature.
I will call it, short-term saving fix to allow for a level of consumption that may be the same or less than the pre-rescission level. It may it it may not lead to long term change in behavior toward long term saving fix.
A story:
A credit card I had expired, was not used.
I called up to re-activate, they said yes, but they would have to cut my limit form the old value.
I was worried they cut it to a thousand or so, not enough to buy
an appliance or something.
I said: will be cut to what?
They: $25K.
I said: $25K is the LOW limit?! Cut from what?
They: $50K.
I said: $50K??!! Since when did I have 50K limit??!! I don’t remember such a thing. Did you guys bump it up gradually over the years, automatically?
They: Yes, but that is no longer the policy …
Just think of all the credt card adds that bombarded people before 2008 and then compare that to the number of ads advising people to save. Definitely an institutional policy that created a trend.
I agree with the responder who indicated that the present environment for saving money is ridiculous. Its not worth stashing money away for 2 or 3 years for the grand and glorious rate of 1%. You will actually be better using available cash to buy current goods at the deep discounts now being offered to stimulate sales. In essence, you will actuallly save more by spending now. Saving implies watching your money grow, and if it is not growing, its really not saving. Rather, it is lending money to the bank at a ridiculously low rate of return and only the bank’s wealth is growing. The reality is that true saving can be accomplished only by purchasing long term investment instruments or mutual funds that offer higher yields and then hanging on to them.
Before the crash, anyone could get credit and most people could get more credit than they should have given their income, exisiting debts, regular expenses and credit score.
Now, hardly anyone can get credit regardless of the fact that they have an excellent credit score, no debts, etc.
This is completely irrational.
People are saving because they have no choice, not because they have learned a lesson.
Once the latest debacle has faded from memory and credit becomes more readily available, most people will go back to their old ways.