Frugality: “The New Normal”

iStock_000007893322XSmall[1]There is constant reference in today’s economic world to the term “The New Normal”, which means something like “get used to it Jack, this is the way it is”.

I’ve spent several hours last week listening to various economists discuss the state of business and the economy. Much of their analysis is sobering–Business continues to drift, employment is sluggish, interest rates are at all time lows (but so is lending), blah, blah, blah. Overall while there is a feeling that while we may be making marginal progress economically, the economic reality is that for the most part, with the exception of a few industries, business is still largely in the toilet.

What’s troubling as we look over the horizon is the almost universal feeling that heavy government borrowing, caused by a budget where our spending greatly exceeds our revenue, puts our future at risk.  Couple this with a runaway “entitlement” system of Social Security, Medicare, etc. puts us in grave danger for the future. Unfortunately our political system avoids dealing with long term issues until they become short term crises. We will hit the wall here as well in the coming years and we will deal with government spending issues when we are forced to.

So do I have anything to add to this sobering outlook?

While I am not an economic optimist and clearly don’t have the background of those who have spent their lives following the economy (maybe that’s an advantage however) I have a slightly different perspective.

Here’s my take:

The lethargy that the economy is going through, and real pain by experienced by businesses and individuals, are our wake up call to the new reality we face, hence “the new normal”. I believe frugality is the new normal, and that there’s a significant upside to this frugality.

Up until 2008 businesses and the consumer at large spent as if continued prosperity was a given and that it was OK to spend tomorrow’s dollars today with little concern. On a consumer basis, much of the American public bought houses, cars, toys, etc. beyond their means. Credit was plentiful. Want a house (or houses)? No problem. Get a “no doc” loan. We all thought that real estate would continue to appreciate in value. Therefore many buyers began their new mortgages paying interest only, and then thought that years down the line they’d deal with the balloon payments due. We’ll sell the house for multiples of the original price anyhow at that point, we thought.

We all know that the economy hit the wall in 2008. The financial system came crashing down. Financial institutions had far more worthless loans than they could handle, and many of us found our houses “under water”, worth far less than the money owed. So financial institutions stop lending money, and increased foreclosures.

Consumers cut their spending. Obviously those out of work, or those who fear for their jobs, cut WAY back on spending. The American public now saves more and that part of our current economic malaise is very good, long term. However increased consumer spending no longer fuels business growth. Therefore, businesses have cut back, reduced staff, and many good people have lost jobs. Unemployment at 9+% is still very high and underemployment is far higher. For the most part we are still caught in the same catch 22. Consumers may spend a little more, but far more frugally, and business may expand, but ever so slightly and hire VERY cautiously.

The good that may come out of this period is the recognition that frugality as a business and personal strategy provides a cushion for a “rainy day”. The American public needed to save more $, and now they do. Frugality and humility are to be respected. Conspicuous over-consumption is not.

This new found frugality dampens the short term hoped-for economic rebound, hence the “new normal”. We may be in an economic drought where the economy improves marginally but is largely stagnant for several years. My hope is that when this economic malaise ends, and it will ultimately, that we will not forget the horrific lessons we have learned.

Unfortunately, adversity is often the best teacher. But a little more savings never hurts.

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