Will We Save Money Like Grandma Did?

Regular contributor of topic ideas of my blog, John Bennett, sent me this Newsweek article that explores how the generation raised in this recession might live differently.

Unlike in previous recessions, a more frugal life outlook might hold this time because the economics of the world, in general, will force Americans to save more, spend less and make different decisions about consumption.

According to the article, “the personal savings rate has more than quadrupled from its 2008 low to the current rate of 4.5 percent.”

This is amazing to me. Back when I worked at the Concord Coalition, a federal deficit reduction advocacy organization lead by Senators Paul Tsongas (D) and Warren Rudman (R), we watched in horror as the American average savings rate went in to negative territory. Meanwhile, the Japanese and Germans had a strong, consistent personal savings rate.

This had an impact on our federal budget deficit, as the amount people saved impacted the price of bonds and (in a complicated way that I’m not very good at explaining) the deficit that we funded with those bonds.

The article also predicts that we are entering “a new age in which young graduates can’t expect to do better than their parents—and one in which Wall Street is perceived as being able to continue business as usual while Main Street struggles.” Heck, I’m already there. I doubt that I will do as well as my parents. Although that might come from my personal choices to try to save the world, rather than anything else. Yet, over-all, the number of kids who do better than their parents is dwindling.

It creates an interesting set of ideas to think about as the Baby Boomers pass on. First, the Generation X-ers will be living off what their parents leave them, which, in the aggregate, will be more than any other time in history. Yet, there may not be much left after the Baby Boomers live longer, spend more on health care and then, finally, when we have to find a way to pay off all of the debt accumulated in our massive federal debt.

What does this mean for the housing market? I think in the 15-20 year time horizon, you can expect that many large homes will be left to the next generation by Boomers. Unless there is a continued influx of immigrants who improve America’s productivity level (not just service jobs), those homes might just sell for less and be worth less.

On the positive side, however, the Recession Generation is learning something that the eco-friendlies in the Boomer generation have been saying for decades with little response: live smaller. Dry your laundry on a line, compost, reuse things that break, live in a smaller, more energy efficient home.

When I lived in Bosnia, many folks did these things without thinking about it –even in 2007 when I went back to visit. An economist would say that it was because they had a lower standard of living and had to do these things because they had no other choice. This is true. Yet, the frugal part of life there never left me feeling that my standard of living was all that bad. In fact, it made me feel better about my lifestyle and my impact on the environment in many ways.

I hope we get a little of that New Frugality in America and it sticks.