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.
Ditto to the feeling of being victimized by living a frugal life style. I had the same experience while helping put my kids through college.Also equally puzzling was that after getting divorced I could no longer deduct the interest earned on Savings Bonds used to pay for educational expenses even though they were in both my children’s name and mine. That is one twisted piece of legislation there. Why not further penalize someone when they are in a financially vulnerable situation. What a government we have.
Here is another good reason to save: There will not be any “recovery” from this recession, regardless of what the politicians say. This country no longer has any significant manufacturing base, so our economy in recent times has been driven approximately 65-70% by consumer spending. We will never recover our manufacturing/export base because of the availability in “emerging economies” of incredibly cheap labor and a business environment free of environmental and other regulatory costs. The disappearance of the easy credit that brought us to this point means that we can no longer serve as the world’s ultimate consumer. In the new global economy, there is little we can do to control our own economic destiny. Americans are in for a long-overdue and lengthy period of “belt-tightening” and so everyone unwilling or unable to rely on government assistance of one kind or another is well-advised to maintain a nest egg to cover his or her inevitable unforeseen medical and similar expenses.
Saving is an illusion that has been fostered off on us as something for our benefit but really funds the plunder of the country (and world) by Wall Street and its cadre of revolving employees at Treasury. How are the jail sentences for Enron executives explained when Wall Street firms get bail outs and bonuses funded by our tax dollars? Enron was not a Wall Street bank.
Eat, drink, and be merry, for tomorrow we will be broke.
I think the author’s hypothesis makes a lot of sense, and I think the person posting on February 5, 2010 at 2:23 pm makes a good point as well, that the pendulum may well swing the other way. What I don’t understand is that person’s glib assertion that “as usual, our problems are caused by the government,” when two sentences before that they observed that companies were sure to start lobbying for looser restrictions on lending as soon as the crisis was past. Wouldn’t it be equally logical (maybe more) to cite this as an example of the short-sighted greed of corporate America? Can we finally discard these nostrums in favor of more thoughtful analysis? I hope the corporate world AND the government are able to learn from this crisis, even if that hope is naive.
Americans, have been told to spend to keep our economy going. That also contradicts with the government’s message, “We can’t take care of you when you retire so, we are going to have all of in mandatory 401k’s”! People want everything for nothing and that is what business and our government knows. Think about this. If people continue to spend and another financial tsunami happens (and it will), the older citzens will go back to work for pennies on the dollar. You now have another pool of cheap labor to work for your business. Therefore, you have low wages and a higher profit margin. Don’t believe me! Look at what is happening now and where we are headed in the future. Kids want everything right now and other than passing and taking tests, you now have a highly educated workforce that is great at following directions but can’t think independently for themselves.
Article is correct because people seldom change. They can try and put an effort in the beginning but in the end will succumb to their bad habits, in this case, their bad habits of buying on credit. In the end, we go back to our old ways and that is why the economy behaves the way it does – endless cycles of bubbles and recessions. Until we learn to think independently and become immune to sheep mentality (But everyone else is doing it – I like to call it ipod mentality), the vicious cycle will continue.
Why no mention of an expectation of savings with little or no interest return. We are at 1 or 2%? That is an insult.
Many business owners have a poor saving culture. Every money they make in their business is consumed, and in most cases the money are spent on things that will not bring any increase to the business. Because they spend all the money of the business on things that are not in line with the mandates of the business, the business is sure to fail. Materials and other business consumables for the smooth running of the business cannot be bought because adequate provisions were not made for it.
The lack of proper saving culture among business men is a major factor to be highly discouraged if we must make meaningful progress in business. Working capital should always be made available if the business must survive. A business man that has no reserve cannot succeed in business, because when opportunities for his business advancement arrive he will not be able to quickly seize it. And in most cases where he is able to secure a loan to make good use of a profitable business opportunity, the interest rates and the amount he is expected to remit as an install mental payment of the loan facility will drain him of adequate liquidity to run the business.
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People deserve wealthy life and home loans or secured loan will make it much better. Just because freedom is based on money state.