BusinessWeek: The New Age of Frugality

Interesting to see a lot of our theories [Dec 8: Do the Bottom 80% of Americans Stand a Chance?] now hitting mainstream media... the open question of course is this a cyclical change (during a recession) or the start of a newer (and frankly lower) standard of living as more are forced to live within their means. We continue to believe the latter but we won't be proven correct or incorrect until we look back in 5-10 years. But just going from a national savings rate of 0% to 5-6% would be a switch of significant magnitude for our entire consumption culture. The difference to me is this decision to consume less and within means won't be a choice, but a necessity. After losing house ATM, and then maxxing credit cards, and emptying out 401ks and IRAs - there won't be anywhere left to turn.

No matter what you believe in the "long run" believe this - this is a consumer led recession - our first since the 70s/early 80s. It is very different than the corporate led recessions of the early 90s and 00s and I think Wall Street is just waking up to this after living in a (gaudy) cocoon. I guess when job losses actually hit the financial sector, it has a way of waking one up to how the "other half... err 3/4ths... err 9/10ths... live"

• On a shady lane in New Hope, Pa., a quiet revolution in American culture may be taking shape. Here, a family of four lives in a white, colonial-style house in a manner that once would have been considered All-American but more recently has been seen as just plain weird: They're frugal. Meet Leah Ingram, Bill Behre, and daughters Jane, 13, and Annie, 11. They walk most everywhere, they rarely eat out, they sometimes buy clothing at consignment shops, and they turn the lights off when they leave a room. Theirs is no hard-luck-in-a-recession story. The Ingram-Behre family is solidly middle-class, fully employed, and not especially threatened by the conniptions gripping Wall Street.
• That's now. A little more than a year ago, the family was ensnared in America's consume-at-all-costs culture. During the days of soaring home prices and easy credit, they took out a $101,000 home-equity loan on a previous house and spent lavishly on a lifestyle upgrade—going on three cruises in two years and taking the kids on annual pilgrimages to Disney World. "After 9/11 it became patriotic to shop, and we became as patriotic as anybody," (USA! USA! USA!)
• Ingram and Behre are harbingers of a dawning Age of Frugality. People who overconsumed during the past decade are now rejecting extravagant lifestyles. They're spending less, and more wisely. Some are getting their finances in order. Others are fearful of losing their jobs, shocked by investment losses, or hunkering down amid the general uncertainty.
• The penny-pinching is already showing up in the numbers; this quarter could mark the first fall in personal consumption in 17 years.
  
• And with credit tight and Americans loaded down with $2.6 trillion in personal debt, consumer borrowing dropped in August, the first such contraction since 1991.
• Menzie D. Chinn, who teaches economics at the University of Wisconsin, figures consumers won't be in a position to spend freely for five years.
• Which brings us to what John Maynard Keynes called the paradox of thrift. What's good for the individual, argued the famous economist, can ignite or deepen a recession. But that won't deter the newly thrifty. "I can't help the economy," says Kim Schultz, a resident of hard-hit Avoca, Mich., who with her husband, Jon, owes $40,000 in credit-card debt. "I've got to help myself." (I believe we were told this is unpatriotic - if you don't shop you are helping the terrorists. You are either with our mall based retail outlets or you are against America)
  
• On the other hand, this newfound austerity could—emphasis on could—rewire Americans as savers rather than spenders. And that would help put the economy on a sounder footing over the long haul. (I agree 100% with this)
• Thrift has gone in and out of style since the founding of the republic. In the McGuffey Reader of the 19th century, Benjamin Franklin was held up as a paragon of virtue for his frugal ways. Later, people who lived through the Great Depression were in some cases marked for life by the experience.
  
• Typical of them is Bernard Handel, an 82-year-old resident of Poughkeepsie, N.Y., who grew up poor in the Bronx. In the early 1930s, his father's grocery store failed and his dad couldn't find another job for several years. To this day, even though Handel became very wealthy, he shops for food with coupons, drives a Honda, and takes the subway rather than taxis. "I just don't believe in throwing money away," he says.
• Handel's baby-boomer children grew up without psychological scars from the Depression. And the boomers' children have come of age in an era of abundance, easy credit, and a taste for luxury. So it's no wonder that the sudden need for thrift comes as an upsetting shock for many.
• As joblessness creeps up, many more Americans will receive their own crash course in frugality. It has already happened to Ned Penberthy, 53, a salesman who lives in Pelham, N.Y. He recently got a new job, took a cut in base pay, and has been living the frugal lifestyle ever since. Penberthy says he's in it for the long haul—willing to spend more up front to reap savings over the next several years.
• Like a lot of boomers, Penberthy has a nest egg, but many people in their 20s and 30s have little to fall back on. To get on track, they have to learn the difference between necessities and discretionary spending. "They need to go back to [psychologist Abraham] Maslow's hierarchy of needs—food, clothing, shelter, and transportation," says Kristine E. Miele, a financial planner.
• In the past, consumers have gone shopping the moment the sun came out. But this time? Market researchers trying to divine the consumer psyche are picking up signs that attitudes are changing. Much the way pump prices have prompted many Americans to forsake SUVs for small cars, the collapse of home values and 401(k)s will make consumers think twice before hitting the mall. (again, very unpatriotic people to look out for themselves rather than retail outlets)

The NYTimes also follows up with the gasping from teeangers across the country as their parents actually have to say "no" (we discussed this in [Jul 5: Bloomberg: Teenagers Skip $50 Jeans in Squeeze of Gas, Job Shortage])

The Frugal Teenager, Ready or Not

• WHEN Wendy Postle’s two children were younger, saying “yes” gave her great joy. Yes to all those toys. The music lessons. The blowout birthday parties. But as her son and daughter approached adolescence, yes turned into a weary default. “Sometimes it was just easier to say, ‘O.K., whatever,’ than to have the battle of ‘no,’ ” said Mrs. Postle, a working mother who lives in Hilliard, Ohio, a middle-class suburb of Columbus.
• This year her husband’s 401(k) savings are evaporating. Medical bills are nipping at the couple’s heels. Gas prices are still taking a toll. Mrs. Postle recently decided that although she and her husband had always sacrificed their own luxuries for Zach, 13, and Kaitlyn, 15, the teenagers would now have to cut back as well.
• “I tried to tell Kaitlyn, ‘We’ll get the Hollister jeans at a thrift store,’ ” Mrs. Postle recalled. “She got angry and said: ‘That’s gross! Other people wore them!’
  
• Indulged. Entitled. Those labels have become hot-glued to middle-class and affluent teenagers born after the last major economic downturn, in the late 1980s. They were raised in comparatively flush times by parents who believed that keeping children happy, stimulated and successful, no matter the cost, was an unassailable virtue.
  
• But as the economy totters, many families have no choice but to cut back, which may lead to a shift in their thinking about money and permissiveness. (somehow they'll live) Last week a semiannual survey of 7,000 15- to 18-year-olds by Piper Jaffray, an investment bank and research firm, showed that annual discretionary spending by teenagers, whose money comes from allowance, gifts and part-time jobs, had dropped 27 percent to $2,600, from its spring 2006 peak of $3,560.
• “Parents are suddenly saying ‘no’ and their kids are saying, ‘What do you mean?’ (hah) These are difficult conversations. Panicked, stressed parents are struggling to explain and impose restraints, just when teenagers are expecting more spending money, not less. Many adolescents respond with anger at what they see as a bait-and-switch world, fear for their families and confusion about budgeting.
• “It is an unbelievable shock to affluent families that their lifestyles are gone for good,” Dr. Manning said, “and their children are ill prepared for it.”
• American teenagers, many of whom have weak quantitative skills, are generally naïve about finance. (why do we not have Finance 101 in high school? As a requirement? Surely more important than home economics? I mean if someone understood getting a $300K mortgage with a $42K salary had implications maybe they would of policed themselves?)
• One recent morning, students in an economics seminar at Elisabeth Irwin High School, a private school in Manhattan, displayed an emerging grasp of the financial meltdown. But when discussing their personal finances, many just seemed bewildered. And while many had debit and credit cards, some were hard pressed to explain the difference. “I don’t understand why I got charged for an overdraft,” one junior said. One girl admitted to having once run up $5,000 on her credit card. Lesson learned! Now she rarely uses the card. “ I make my mom buy it!” she said.
• They all felt the pressure and the desire to acquire: their knowledge of brands and prices was encyclopedic. (now this, they are subject matter experts - balancing a checkbook? Not so much) “The stuff it takes for them to be perceived as middle class is extraordinary,” said Tom Murphy, who teaches the high school’s “Economics and Society” seminar. “Laptops, Xboxes, iPods, phones — and it’s nonnegotiable.”
• After class, one girl said: “We are so being bribed. I’m bad at math but if I get an A, my father will give me a designer bag.”
• “The kids are going to be confused. They’ve never known not having what they want. And the parents are going to have to tolerate their kids’ anger.”
• “I used to ask for things and my parents would say, ‘We can’t do that,’ ” she said in a phone interview. “So I would throw a tantrum and get an attitude. They used to give in a lot. But that doesn’t work now.”

This is going to be one serious cultural shift.