Frugality, savings, and the causes of doom

Okay, I know that writing about the same thing other bloggers are posting is a form of mob journalism, much to be avoided. But what the heck… Pimp Your Finances is riding one of my favorite hobbyhorses, the argument that saving and frugality are harming the economy. We cheapskates are to be blamed for the fall of civilization as we know it.

No. ‘Fraid not.

As I was harmonizing with PYF’s rant, it occurred to me that there’s a subtle difference between saving and frugality.

Saving means setting some money aside for future use. Generally savings go into bank accounts or into other financial instruments with higher risk and higher potential return.

Frugality means living within your means: spending less (or at least no more) than you earn.

Most people who are frugal are in a position to save money; obviously, if you manage to spend less than you earn, you can take that unspent money and invest it somewhere. But some people who are profligate—who have run up revolving debt or have bought more house than anyone in their right mind could possibly claim to need—also are able to save money, if only through mandatory 401(k) or retirement fund contributions.

My Journey to Millions added a comment to PYF’s post noting that savings do not get locked in a vault somewhere. Banks loan out depositors’ savings (or so they’re supposed to do) to individuals and businesses, and that’s a large cog in the wheel that is our economy. When banks refuse to lend, as they’ve been doing in the present crunch, the economy grinds to a halt. Thus saving not only is not bad for the economy, it’s crucial to any nation’s economic health.

What short-sighted critics are saying is that frugality—which they equate with miserliness—is wrecking the economy. These are the ninnies who suggest that if we would just all hurry to the mall and max out our credit cards on junk we don’t need, everything would be just fine.

Here’s the hitch in this thinking:

When the bank owns your car, your house, your furniture, your clothes, and the dinner you sit down to at a restaurant, you’re renting your whole life and you have nothing. Although you may look affluent, the truth is you’re living in poverty. Living on the cuff creates the illusion of wealth, but it’s only an illusion.

It’s like living in the Land of Oz. Behind the lights and mirrors, our late, great “prosperity” was phony. With everyone spending until their income went mostly to service debt, no one had a REAL nickel or dime to rub together.

When everyone spends and saves responsibly, from the average person on Main Street to the A.I.G.’s of this world, then the economy will be healthy. The economy is healthy when most consumers, businesses, and lenders are financially healthy.

There’s no “paradox of frugality” here. None at all. Just a fake wizard in an Emerald City.

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krsnakhandelwal March 17, 2009 at 7:35 am

you have very rightly explained it all. Banks should be wary of lending fopr consumption, if they lend for a workshop or business then not only the consumption will rise and the incomes will rise , there will be reward for saver and reward for the borrower. In recent lending , all norms were put aside and it brought every to grief.

Abigail March 17, 2009 at 12:29 pm

I have to agree with you: For the most part, people are being frugal, not “saving.” Though I think that saving isn’t such a bad idea either.

I know this sounds callous — and certainly I hate to hear about people losing jobs and dire economic predictions — but I think that currently our economy is predicated on living irresponsibly. Perhaps that wasn’t true once. But it has become true.

So, to go along with your Oz reference, it’ll probably get darker before it gets lighter. The reason so many businesses are having to let people go is because they expanded in good times. This is simply applying Newton’s law to economics: What goes up, must come down. You can call it a market “correction” or a “recession” or even a “depression,” but it’s simply the yang to our previous yin.

Of course, when we see it humanized, it’s awful. But I don’t think frugality is to blame. I think lack of frugality over the past decade is to blame.

But people not spending money are easy targets when business is drying up.

myjourneytomillions March 17, 2009 at 1:05 pm

Thanks for the mention! Glad you liked my comment.

frugalscholar March 17, 2009 at 2:08 pm

I think I posted something to this effect a while ago, but I’ll repeat anyway. Those of us who have been frugal for a while are spending as usual these days. So wouldn’t the formerly NOT frugal be the ones who are spending less?

Abigail March 17, 2009 at 3:24 pm

This post got me up a good rantin’ head of steam so I sort of took off from this point on my own post, if you care.

Thanks for the inspiration!

funnyaboutmoney1 March 18, 2009 at 6:31 am

@ Abigail: It’s good! Obviously a great mind in the same path. :-D

@ Frugal Scholar: Sure seems that way, doesn’t it? {cackle!} So it’s the formerly profligate who got us into this mess and now it’s the newly frugal who are keeping us in it. Upstarts!

punditius April 17, 2009 at 5:33 pm

I dunno. Money is funny stuff. It doesn’t necessarily behave the way one might think. The reasons for being frugal have nothing to do with the economy. They have to do with how you want to live your life.

Some people like to surf with their money. Spend it all when they get it. If the economy in general is in inflationary mode, those people come out ahead. I know – I was there when it happened back in the seventies. But those people also come out ahead if they can keep surfing. Anyone living the unpredictable life – actors, waiters (but I repeat myself,) odd job guys, underground economy people – they just keep on surfing. They are people who don’t need to actually own things, as long as they have them.

Some people like to hang on to their money. Make it work for them by building up their capital. In a non-inflationary economy, that works very nicely. I think maybe we are entering a non-inflationary period, if we can avoid deflation. The squirrels will be happy about it, and have lots of nuts.

I don’t know what happens in a deflationary economy. I’ve never lived in one. What bothers me about it is that our money is just paper. If it were backed by a precious metal, I would be a lot less concerned about deflation, since I have a pretty much solid pension that will not deflate along with the economy. But hard assets, like investment houses, could well deflate. Hard to tell what that would mean.

funnyaboutmoney1 April 17, 2009 at 6:32 pm

@ punditius: Interesting rumination. Agreed, that frugality is a lifestyle decision (oh! pop-soc’ talk!) that reflects aspects of the individual’s personality. I hope you’re right about a coming non-inflationary period, although I fear the results of pumping vast quantities of cash into the economy.

I also remember the 70s. My father scrimped and saved all his life so he could retire in what he expected would be reasonable security. The $100,000 that he thought would provide that security lost so much value that by the end of the decade he was living in poverty. And today none of us would dream of trying to retire on a hundred grand: it wouldn’t last even a canny frugalist for long.

The ex-, I guess, was a kind of surfer. He also earned a good income. That notwithstanding, by the time I fled we were three-quarters of a million dollars in debt. In retrospect, I realized he didn’t see that as a problem, specifically because he wasn’t bothered by living his life on a rented set. He had enough insurance that if he predeceased me (which wasn’t likely), I could have paid off the house and most of the revolving debt. In any event, your debts don’t pass to your heirs, and so he probably figured it didn’t matter how much debt he racked up, as long as he kept his credit ratings high, which he did.

He and his second wife still live in our house (now worth over $700,000), travel to Italy and Ireland at the drop of a hat, and move in elite circles. My son says he’s still in debt up to his teeth. Maybe the trick is to surf and let tomorrow take care of itself.

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