Wed 13 Feb 2008
Is Recession A Result of Frugality?
Posted by RichSlick under Money Management
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As the U.S. economy heads into recession there have been many theories as to the root cause but the net effect is pretty straightforward, less consumption means lower profits for businesses.
The Starbucks sells less coffee and is forced to reduce coffee inventory and coffee purchases. Less demand for coffee pushes price of coffee commodities down hence losses on the futures exchanges for investors. Soured investors dump coffee futures which pushes the price of coffee down which in turn causes Coffea farmers to reduce next years planting season.
Lower planting season and smaller fields lead to less consumption of fertilizers, pesticides, and other farming equipment used in farming.
I could go on but I think you get the point. You can apply this trickle down theory to almost any industry: automotive, airlines, consumer goods, etc.
Of course, the counter-arguement is if everyone had exercised frugality, we wouldn’t be in a recession now right? If that is true then we wouldn’t have had the returns the Dow, S&P and Russell have had over the past 7 years right?
So which is worse, crappy returns with frugal consumers or phenomenal returns with over-extended consumers?
In the end, my personal investment strategy is to make money either way but where do we go from here is the big question.
February 13th, 2008 at 8:19 pm
Frugal living enables individuals to spend more later in life. By practicing delayed gratification now, I will be able to splurge on those expensive lattes, iPods, and long vacations later on. In the long run this is better for the economy.
I drive a paid for car. I don’t carry a credit card balance. My disposable income is greater then the Joneses because more of my money has my name on it rather than VISA at the end of the month.
And if I choose to invest it? It goes into the hands of wallstreet traders to bid up the price of stocks, thus creating more wealth for all.
Frugality is a good thing.
February 14th, 2008 at 8:32 am
Why is it better to spend more later in life? Isn’t that essentially time-shifting consumption?
I don’t necessarily disagree with you BUT you are making an assumption that you’ll be around much later in life. We all have an expiration date and there is no guarantee you’ll hit 50, 60, 70 or 80 in the future. The deck is literally “stacked” against you from day one when you’re born.
I would argue however that if everyone waited till later in life to spend like you suggest, then inflationary pressure would wreck havoc since everyone would be chasing the same goods with the same dollars - the price of everything would go up. Keeping up with the Joneses then would be twice as impossible as it is now.
February 14th, 2008 at 9:19 am
I really think that the amount of people who currently don’t exercise frugality far outweighs the number of people who do and we have the credit crunch situation as evidence of that. This is not a frugal country or culture and proof of that is the amount of households that carry a credit card balance. So, I don’t think this recession is the result of frugal folks.
February 14th, 2008 at 9:25 am
“I would argue however that if everyone waited till later in life to spend like you suggest, then inflationary pressure would wreck havoc since everyone would be chasing the same goods with the same dollars - the price of everything would go up. Keeping up with the Joneses then would be twice as impossible as it is now.”
Yes, but not everyone was born at the same time so this effect is self balancing. I exercise frugality not to live better in the future but to have the same lifestyle while also enjoying my life right now. I agree with you that one shouldn’t put off enjoying life for the future. You should be able to do that while living within their means and I think that’s what a lot of people call frugality these days.