The Era of Thrift

Consumers and Businesses Cut Spending

December was the sixth month in a row to show a drop in US consumer spending, and the personal saving rate is higher than it's been in six years. We're proving, once again, that when the going gets tough, the tough get going. Job losses and salary decreases are on the line, and we don't want to be caught unprepared. 

Of course, business spending is also decreasing, especially in the construction and housing sectors. When consumers aren't buying what you're selling, cuts must be made. Which brings us back to additional job losses and salary decreases...The cycle continues. 

So on one hand, we deserve a big pat on the back for weaning ourselves from the almighty credit card and building up some savings. On the other hand, our thriftiness is accelerating the bad economy.

The Right Saving / Spending Balance

But don't take that as justification to go on a shopping spree. The "buy now pay later" mindset is largely what got us into this mess. 

The key is to find the right balance between saving and spending. We used to know what that was: Since 1929, we had been saving about 7 percent of our disposable income. But a few years back that figure dropped to almost zero. With soaring housing prices and a wealth of equity built up, who needed to scrimp and save?

But now we're getting back on track, painful as it may be. The housing crisis and ensuing credit crunch are as necessary to this country as a drug intervention is to an addict: we were spiraling out of control and headed for disaster. True, withdrawal is a painful process, but ultimately a necessary step in rebuilding a healthy economy. As economist Peter Schiff says, this recession "isn't the problem, it's the solution." The improved habits we're forming in this "era of thrift" will help us to maintain a more stable economy in the future.