Flexo over at Consumerism Commentary recently posted that frugality is bad for the economy. Among similar statements, he says: “The primary tenets of frugality work well within an individual’s personal finance philosophy, but once the concept becomes a movement that spreads to a greater population and businesses, the economy can’t move.”
If we look back at some of the circumstances that brought us to the current state of hurt we’re in, things were rosy. In the first part of the last decade, real estate was no-lose. Mortgage rates were low (due in part to an easy-money policy by the Federal Reserve that caused lenders to compete) and lending standards were lax which increased the number of homebuyers (and developers) competing against one another. People were house-rich, and people borrowed against the rising equity in their homes to buy stuff.
This worked great, until it didn’t. Banks failed, lending standards tightened, home prices fell. People were trapped. Adjustable-rate mortgages began to reset, and they continue to do so. Those that weren’t foreclosed on are strapped, or at the very least unable to move because their homes are under water.
One can say that the economy was moving in the first part of last decade, but it wasn’t really moving on disposable income brought about by people’s labors as much it was brought on by borrowed money, and a lot of it. Eventually the party stops, and the tab has to be settled.
Frugality is good for what ails a burnt-out economy
Following a season of excess comes a season of thrift. People went into great debt with their houses because they could, and lots of people got into real-estate-related fields because that’s where the money was. The problem was this: it was too much money. A lot of money turned out to be mis-allocated when the housing bubble popped. A side effect was that businesses all over were seeing a lot more sales because people were borrowing against their houses. This money isn’t flowing as easily anymore, and when this is coupled with the high unemployment rate, it means harder times for a lot of businesses.
People just don’t have as much money to spend. Or, more to the point, they have to lower credit card debt and pay off home equity lines of credit. They have to be frugal.
This is necessary to get the economy humming again in the regular way. Certainly some businesses are doing well now: debt consolidation agencies, used goods, pawn shops, auctioneers, and anyone else who (a) helps people to get back on their financial footing, (b) sells things that people can buy on a budget, or (c) helps people to liquidate their holdings if the bad economy gets the better of them. But on the whole, people need to get their purchasing power back, and that means digging themselves out the hole.
Money that was mis-allocated needs to be re-allocated. Frugality helps to accomplish this.