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Frugality: A New Normal for Developed World Consumers

Frugality: A New Normal for Developed World Consumers

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Published by Ron Robins
Other than for relatively brief periods, there is not much chance of marked increases in consumer spending in most developed countries in the decade ahead. Their rapidly aging populations are moving from their high spending years to ones of saving, then to frugality in their retirement years. Additionally, developed world consumers will be: severely challenged financially due to increased taxation; uncertainty in the value of their assets; the need to promote personal savings as government medical, pension and social programmes are restricted or eliminated; rising living costs likely unmatched by income gains; and the fear of unemployment.
Other than for relatively brief periods, there is not much chance of marked increases in consumer spending in most developed countries in the decade ahead. Their rapidly aging populations are moving from their high spending years to ones of saving, then to frugality in their retirement years. Additionally, developed world consumers will be: severely challenged financially due to increased taxation; uncertainty in the value of their assets; the need to promote personal savings as government medical, pension and social programmes are restricted or eliminated; rising living costs likely unmatched by income gains; and the fear of unemployment.

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Published by: Ron Robins on Feb 15, 2011
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03/13/2011

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Frugality: A New Normal for Developed World Consumers
By Ron Robins, Founder & Analyst,Investing for the SoulBlogEnlightened Economics;twitter First published February 3, 2011, in his weekly economics and finance column atalrroya.comUS media recently rejoiced in the fact that retail sales were moving higher. But areality check is needed. Firstly, the purported gains in US retail sales are illusorywhen adjusted for real inflation rates, reports respected economist-statistician JohnWilliams at shadowstats.com. Secondly, much of the so-called increase in retail salesis accounted for by a small segment of US consumers: the rich. They are spendingmore as they are benefiting from higher stock prices, says Michael Feroli, who ischief US economist at JPMorgan Chase & Co, and quoted in a January 18 Bloombergarticle.But the prospect of US-inflation-adjusted retail sales continuing higher for more thana few months or a year or two is improbable. To begin with, for Americans, theEuropeans and Japanese, amongst others, there is the increasing realisation of muchhigher taxes required at every level to avoid gutting key federal, state/provincial andlocal government programmes. The underfunding of government medical, socialassistance and pension programmes is so large in most developed countries thateven with major cuts to them, higher taxes will be needed. (In the US, mostmembers of President Obama’s National Commission on Fiscal Responsibility andReform came to the same conclusion.) Thus, higher taxes means after-tax incomesfall and so does spending.However, for 2011/12 Americans can enjoy some relief in federal taxes due to theextension of the Bush-era personal income tax reductions that were included in the$900 billion stimulus bill passed in December 2010. But based on past results of suchefforts, it will only add many hundreds of billions to the US federal debt—which willmean even higher taxes to pay in years to come.Continuing unsustainable deficits and debt in almost all developed countries willgreatly restrain their economic growth for many years. Perhaps the most respectedand quoted study on this topic is by professors Carmen M. Reinhart and Kenneth S.Rogoff. In their 2008 study, This Time is Different: A Panoramic View of EightCenturies of Financial Crises, they found that once government debt reaches 90 percent of gross domestic product (GDP), economies slow considerably for many yearsthereafter. By the end of 2010 the US Federal debt at about $14 trillion was flyingpast that 90 per cent threshold and could exceed 100 per cent this year and continueto rise substantially for years to come.As forbidding as professors Reinhart and Rogoff’s study is for the welfare of thedeveloped world, it might be even worse. It is probable that most of the countrieswith debt crises in their study had young and growing populations. That is not thesituation today where, uniquely in history, we have fast-aging populations, relativelyfewer able-bodied people working, and in some developed countries, actuallydeclining populations. Climbing out of the gigantic debt vortex will tax developedcountries in ways that no previously indebted societies have ever had to deal with.

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