Charting a Path to Renewed Frugality
You are probably thinking: “Enough with the facts and figures already, Mr. ToughMoneyLove. We want to read how we can save and invest in this awful economy.”
Hey – I feel your pain. I’m asking those same questions. I don’t have confidence that the government can provide the answers. Instead, I’m looking for answers in the data that are available. At least the government can provide data.
To that end, I have reproduced below a chart published by the Federal Reserve Bank of St. Louis. This chart tracks the personal savings rate of U.S. consumers from 1957 through November 2008. Gray areas overlayed on the chart represent periods during which the U.S. economy was in a recession (according to the National Bureau of Economic Research).
Some economists have forecast that our personal savings rate will continue to increase, reaching 5% by 2011. We haven’t seen that since 1993. These same forecasters see the savings rate remaining in the range of 2.5% to 5% even as the economy begins to recover. In other words, they predict that a semi-permanent sense of frugality has been instilled in the minds of American consumers. (Source: Oxford Economics) If that is true, I say hallelujah.
Oh- I almost forgot. Most experts blame excessive debt driven consumption by baby boomers for the savings rate decline. Sorry about that.
If you are mad at baby boomers for all of this, rest assured that we have been and will continue to be punished. Many boomers haven’t saved a penny for retirement. Those of us with retirement nest eggs have seen them trashed. Collectively, boomers’ only hope for recovery is to work longer or be faced with declining living standards. (Source: McKinsey & Company). I don’t like either of those options.
Now you may be thinking: “Enough about boomers, already. They’ve caused us enough trouble.” The problem is that our economy needs boomers to exercise option 1 (work longer). If we don’t continue to earn well into our golden years, three things will happen, both negative for the U.S. economy. First, boomers will have less to spend and invest, further accelerating the demographic slide I wrote about recently. Second, the burdens on Social Security and Medicare will be increased at the wrong time for the economy. Third, boomers will have little or nothing to leave to our children (compared to prior generations), thereby diminishing the capacity of younger generations to invest and spend.
So what does all of this mean? Here’s my take:
1. Baby boomers have really messed things up. (I’m going to humbly excuse Mr. and Mrs. ToughMoneyLove from responsibility for the debt-driven consumption and low savings rate.)
2. Harry Dent’s predictions about the likely effects of the demographic slide are making more sense to me.
3. Dent and others believe there will be a market rally later in 2009, as overall investor fear subsides. Unfortunately, they also believe it will be a short-lived rally. I’m going to watch for that and consider selling into the rally to reduce my exposure to equities.
4. Companies and industries that depend heavily on discretionary consumer spending will continue to struggle compared to 1995-2007, no matter what the government does.
5. Financial institutions (including fixed annuity providers) will be falling over each other trying to attract all of the new money made available by the increased frugality and savings rate. New financial products for low risk saving may appear. I will be watching for those as well.
6. When the government is working hard to create jobs, don’t overlook the boomers. We all need them to keep working.