Words From The Efficiency Experts

Will Coronavirus Create a Nation of Savers?

Posted by Bethany Wood on Mon, May 4, 2020

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The U.S. Consumer Confidence Index has dropped by 30 percent since February, from 101 down to 71.8—the lowest it’s been since December 2011. Unemployment is at its highest since the Great Depression, and many families and businesses are already unable to pay their rent or mortgage among other expenses. Many citizens and experts have expressed fear that America might experience another depression. “We have never seen anything like this," says Princeton University professor and economist Alan Blinder regarding the recent number of unemployment claims. “This looks likely to be deep enough to qualify as a depression."

And it has come at a time when Americans have a lot of financial insecurity. Since 2016, Bankrate’s March Financial Security Index survey has consistently seen 20-21 percent of Americans reporting that they do not save any money at all. In a 2019 survey, 20 percent reported total savings (for any combination of retirement, emergency funds, or other financial goals) at 5 percent or less of income, 28 percent reported 6-10% of income saved, 10 percent reported 11-15%, and only 16 percent reported above 15%. In a recent article from Vox, Laurence Kotlikoff, professor of economics at Boston University, predicts that “If and when people emerge from their homes, they’ll be cowed, not confident, economic actors.”

Of course, the severity of the effect this pandemic will have on our economic confidence is hinged on how much longer it all may last. Housel warns, “Even if this crisis were to end tomorrow — and to be clear, it’s not going to — what we’ve gone through already has been severe enough to leave a generational impact,” he warned.

As the Great Depression molded a generation that kept their savings under their mattresses and in mason jars, hoarded materials, and kept a stockpile of canned goods, we will see similar behaviors come from our younger adult generations following the aftermath of the coronavirus pandemic.

“When you’ve suddenly woken up to the reality that the world is much more fragile than you once believed, you just have a much lower appetite to take risks about the future than you’ve had before,” Morgan Housel, partner at venture capital firm Collaborative Fund and author of The Psychology of Money told CNBC, “I think it’s going to lead to a generation that is less interested in taking risk, and they won’t mind if they’re leaving opportunity on the table because they’re just more and more interested in their downside protection than they were before.”

Kotlikoff says, “the virus, whenever it’s over, will affect our every financial, demographic, and lifestyle decision, from borrowing money to having children to living in crowded cities,” predicting people will start less businesses, borrow less money, and hire less employees, prepay mortgages, play the market less, and increase savings. He also believes that entertainment will more frequently take place at home, moving to dinner parties, potlucks, and board games instead of movies and restaurants, and that we may see a surge in self-reliance, as people learn to grow their own food with the spaces that they have. Kotlikoff also said that this might influence many people living in larger cities to move to more rural areas.

While these behaviors will likely lower GDP growth, Housel says there is an economic upside. “It might lead to a system where we’re actually more capable of managing and absorbing future shocks than we are today,” he says. “Would it be to lower future growth? Probably, yes — but would it lead to a more robust, stronger society financially.” This shift from spending to saving is historically normal following a great economic shock. Uncertainty causes Americans to want to save their money. A recent Bankrate survey reported that the majority of Americans, 52%, have already cut their spending due to COVID-19 concerns.

When dealing with uncertainty, it’s impossible to calculate risk. Taking maximum precautions and planning for future uncertainties both physically and financially are common behaviors when people are living through a pandemic or economic depression. While no one can say for certain how long this will last or how severely it may affect the economy, everyone is certain that Americans will forever be changed.

 

If you liked this article, we think you’ll also enjoy:

How Do We Know When It’s Safe for Business to Reopen?

A Pandemic Economy: Fearing the Unknown

Ending America’s Retirement Crisis

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