Partners - Stock market, economic and political commentary by Patricia Chadwick

The Serotonin of Savings

Or put another way – Saving is the new spending in the United States.

After several decades of Americans being the world’s consummate and most profligate spenders, we appear to have developed (all of a sudden in just the last few months) a serious fancy for saving. This phenomenon is most evident in the Baby Boomer generation, those of us who were reared by frugal parents who themselves were reared during the Great Depression by parents, many of whom themselves were truly struggling to survive.

But when no Second Great Depression ever materialized, Baby Boomers forgot the stories they had heard from their grandparents. It’s a different world now, they thought – more secure, more global, more controlled, more protected. And then just in the sunset of their working lives, as Baby Boomers were on the verge of creating the greatest wave of retirement in this country’s history, when they were all supposed to retire and live merrily on for another thirty years on the fruits of a booming stock market that would never end, they were hit with financial Armageddon.

The generation that boldly took on the world and gave it Woodstock, and ‘free’ love, and feminism suddenly found itself facing the very future its grandparents had described. Savings annihilated in some cases and severely damaged in the best of circumstances. With so little time left before the new young tigers graduating from college oust them from their jobs, Boomers are scared and frantic. Some can and will be able to postpone retirement. But others, like the many autoworkers at bankrupt automobile companies, will not have that option. And it is difficult to compete with the up and coming youth when it comes to job training.

So what’s a Boomer to do? Nobody said they weren’t bright, and they appear to have jumped on the one truly available option open to them. They have resurrected the Great Depression advice from their grandparents and have started once again to save. They cannot control the stock market – yes, it is nice that it has rallied so strongly from that scary moment just eight weeks ago when it looked like there would be no stock market left at all. But they can’t count on that rally to make back all that they have lost. So they are harking back to Grandma’s favorite expression, “A penny saved is a penny earned” (or was that Benjamin Franklin’s aphorism that Grandma usurped?).

A dollar not spent today is a dollar added to the giant loss in the 401(k) plan. Ironically, Baby Boomers have suddenly found the virtue in thrift, and with the exercise of that virtue comes psychic reward. Maybe if they keep on saving, that poor 401(k) plan (that they see is a mere ‘201(k) plan’) will slowing rebuild and before the retirement day of reckoning appears there will again be enough on which to retire, even if frugally.

This change of mind and attitude and action is actually a really good thing – almost every economist worth his/her salt will argue that the savings rate in this country has fallen far too low and must be reversed. So what if it took a crisis of apocalyptic proportion to jolt the Baby Boomers into action. Better late than never.

But there is another side to this virtuous behavior. Every dollar not spent is one less dollar of consumption in the economy and one less dollar of stimulus. Well, not precisely, because in economic mathematics, the savings function is equal to the investing function. And we all agree that investing is a critical ingredient for economic growth. But what this new self-imposed discipline does foretell is a slower economic recovery in the U.S. once we start to emerge from this recession. That means that earnings will recover more slowly as well. It’s all far better than no savings and no recovery, but it won’t be back to the races in economic terms for a long time. Add to all this the eventual expiration of the gargantuan stimulus package enacted by the Federal Government, and the outlook for a strong and sustained recovery in our economy is murky at best.

Tags: ,

Comments are closed.