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Recessionomics: The Myth of Frugality


 

James Surowiecki finally serves up a corrective to the laughable notion that a lasting effect of the recession will be to turn Americans from “spendthrifts to tightwads”. In fact, he argues, Americans haven’t reduced their spending by that much now. Here’s a good part:

In fact, you could argue that consumption has actually fallen less than might have been expected. Spending did drop off the proverbial cliff in the fall of 2008, in the direst phase of the financial crisis, but it stabilized at the beginning of this year, and has now risen for four months in a row. And much of the decrease in consumption since early 2008 can be traced to a drop in spending in just two categories: gasoline (thanks to lower prices) and cars.

Does anyone know of any comparable data for Canada? Stephen Gordon, Nick Rowe — you guys have anything to say?


 
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Recessionomics: The Myth of Frugality

  1. And if you wanted a true comparative look at spending, you'd have to account for changes in national income too (I'm assuming there's less money being collectively made, given unemployment levels, which makes any rise in spending all the more notable).

  2. I'd have to dig it up, but I remember seeing a report on the savings rate of Americans had "spiked" to 10% from a sad low of about 1% before the crisis. This would be a real reduction in consumption, since you can only save what you don't spend, even if saving is made easier by lower gas prices.

    I think this saving increase will be laughably short-lived as the reform of the world economy seems to be largely a return to the status quo and let's face it, neither Americans or Canadians seem inclined to give up short-term standard of living for long-term financial stability.

  3. http://www.calgaryherald.com/business/Canada+Amer

    Do investments count as spending or saving? If people have stopped putting money into the stock market, and are simply sitting on it, that could account for some of the savings growth. Though it doesn't explain the national differences.

  4. Some of us will. And I hope for the sake of our economy and the well being of people in general, we can get a handle on the sad and unsupportable tendency of our culture to live well above our earnings. It just doesn't make any kind of logical sense that spending can be sustained or increased without jobs. And they are still disappearing. Worse yet, people who were laid off early in the crisis are going to run out of benefits before jobs recover and the nimbers are based on unemployment claims without taking into account the people who aren't receiving that benefit. Here is one article: http://www.cnbc.com/id/33197934

    I think we have trouble sustaining better spending habits, but one or two months right before school starts are a long way from a trend and I think the folks tracking the economy are operating at a distance from the people who are living it.

  5. Since the US story is one of excessive leverage, savings rates will be higher as consumers pay down debt.

    But excessive leverage is not why Canada is in recession, so there's not much point in trying to cut-and-paste the US frugality meme and plop it into a Canadian story.

    Real consumption expenditures in the US were 1.9% off their peak in 2009Q2. In Canada, consumption expenditures fell by 1.1% off their peak in 2009Q1, but they'd already started increasing. In 2009Q2, they were 0.7% off peak.

  6. Since the US story is one of excessive leverage, savings rates will be higher as consumers pay down debt.

    But excessive leverage is not why Canada is in recession, so there's not much point in trying to cut-and-paste the US frugality meme and plop it into a Canadian story.

    Real consumption expenditures in the US were 1.9% off their peak in 2009Q2. In Canada, consumption expenditures fell by 1.1% off their peak in 2009Q1, but they've already started increasing. In 2009Q2, they were 0.7% off peak.

  7. Paying down debt counts as savings? (Does it have something to do the fact that savings aren't directly measured, but extrapolated?)

  8. Savings increases your assets – even if the increase just takes the form of reducing your debts.

    • From the above story:

      "The rapid increase in the rate — calculated by subtracting interest payments and household expenditures on goods and services from disposable income — has been driven by lower consumer spending caused by the recession. Savings have also received a boost from government tax cuts."

      From that, I take it that payments against debt principal don't count as savings, for the purpose of national statistics. (But I fully appreciate your point about the pragmatic reality of paying down debt.)

      • Sean, where do you get that quote from? I don't see it in the linked article. From my reading of what you provided, I would think that it is only the interest portion of the payment that wouldn't count as savings, and any reduction in the principle would count. Not that I want to speak for Gordon, who may not even buy into the methodology you have highlighted.

    • In accounting terms, repaying a debt with cash reduces both assets and liabilities, but reduces your leverage (think liabilities/equity, where equity is your net worth).

  9. From yesterday's Fin Post:

    "Household credit is growing at a year-over-year rate of more than 7%, the fastest seen in any economic recession in the post-war era on an inflation adjusted basis, a new CIBC Capital Markets report shows.

    "It's all about affordability. During the first six months of the year, total debt rose by $44-billion but interest payments on debt fell by $3-billion," Benjamin Tal, economist with CIBC, said in the report. "Household credit in Canada is defying gravity."

    http://www.financialpost.com/news-sectors/story.h

    • I read a Bank of Canada report recently that shows the direct link between credit availability and consumer spending.

      It's frightening, when you think how little foresight individuals have,

      I know that if we were to use all the credit made available to our family through credit cards and lines of credit (in addition to the mortgage), we'd be screwed. Even at zero interest.

  10. As for our friends in the USA, why would anyone in their right mind save their US dollars? Their government is currently dedicated to the devaluation of that currency to garbage.

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