Wednesday, April 15, 2009

After the Gold Rush

A lot of people have been talking about what American's spending habits are going to look like when (if?) the economy starts to improve. Some think consumers are going to back to their old habits while others think that consumers are going to be a bit more thrifty. The most persuasive argument I've seen in favor of the latter is this recent piece from the Economist.

While consumer spending habits reached ridiculously unsustainable levels or the past five years or so, it seems like people have been talking about American's propensity for living beyond their means for much longer than that. Given this, it seems kind of strange to hear people characterizing a return to mid-1980s or even mid-1990s levels of personal spending and savings as a return to fiscal discipline. Still, while the Americans of 10-20 years ago weren't exactly pinching pennies, you could still argue that their consumption habits were still within the realm of fiscal sustainability.

The magnitude of the reset is going to be determined by how much wealth is ultimately destroyed and the kinds of new financial regulations that are enacted. If, as I write this, we're closer to the end of this mess than the beginning and some new controls are added to at least address the known causes of our current financial predicament, we'll probably see a modest return to thrift once the dust settles. It would probably take another great depression and world war to turn Americans into fanatical savers. Hopefully, we can avoid that scenario.

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