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Saving is the new spending

“Saving is the new spending” is the tagline for Ubank, which is currently my favourite bank for my SMSF term deposits. I am not sure how true this is in Australia as the mood of the general public appears to be “relax, spend as the good times are coming back again”. Unemployment is down, our housing prices are up and the share market has just had a bumper year. The Reserve Bank has increased interest rates but I am not sure if that has encouraged many people to save more.

However, saving is definitely what many governments of heavily indebted countries are having to do, either by choice or by force in 2010. In 2008-09, many governments borrowed heavily to fund bailouts and stimulus packages. Spending to avoid a recession was the game plan then. When we think of saving or taking “austerity measures“, Greece is the first country that comes to mind. When Greece got into trouble because of their debt in January 2010, they had to promise to take severe austerity measures as a pre-condition for a bailout. In the last two months, Greece has announced several austerity packages in order to reduce their budget deficits. These plans have been welcomed by potential bailout providers such as Germany and the International Monetary Fund. Investors seem pleased as well as the sale of 5 billion euros of new Greek bonds last week was very well subscribed. However, there is of course a heavy price to pay for the Greek citizens who are now hit with wage cuts, frozen pensions and higher taxes. As I write this post, airports, hospitals and schools are shut in Greece as unions protest these austerity measures.

Other governments of heavily indebted countries in Europe have voluntarily cut spending as well. Cuts have been the hardest in tiny Latvia, where a European Union-sponsored bailout has led to 30 percent salary cuts for police officers and teachers. Ireland has imposed income-tax hikes ranging from 1 percent to 3 percent and slapped a 7 percent charge on the wages of more than 700,000 state-paid workers to fund their pensions. According to one Irish government employee “I lost near 10 percent off my wages just like that,” he said, snapping his fingers. “They also took away overtime pay, bonuses, all these supposed `extras’ that you actually relied on to get you through Christmas.” This employee is now having to drive a taxi at night for 30 hours a week to make ends meet.

Over in the US, President Obama is being pressured by the Tea Party Movement to stop spending. The Tea Party Movement is a populist protest movement focused on responsible spending. This movement started with various protests against government spending for stimulus and bailouts in 2009. They were largely ignored by the government then. However, after the Democrat party lost the by election in Massachusetts (a traditional Democratic stronghold formerly held by the late Senator Ted Kennedy) in January 2010, the government is now paying a lot more attention to the demands of populist movements. In 2010, the tea partiers are protesting against Obamacare, Obama’s proposed health care reform, not because it is no good, but because it will cost another trillion dollars or more of money that the US does not have.

I think 2010 (and beyond) is payback time for all the borrowing and spending that was done in the previous years. Unfortunately, the people who have to pay may not the same people who spent but the debt still has to be repaid. If countries want to maintain their good credit standing so that they can continue to borrow in the future, they need to cut spending and save more in order to reduce debt. We can see from the above examples, austerity measures will be painful for everyone and some economists worry that this may lead to a depression like it did in the 1930s. However, I don’t see better choices. Countries could default on their debt but that would destroy their credit standing, just as we would destroy ours if we decide to declare ourselves bankrupt instead of paying our debts.

On a personal level, learning to spend less is not necessarily a bad thing. According to this poll, 62% of Americans now enjoy saving more than spending. That seems to agree with what I watched on Oprah, when she ran a series on “What can you live without?”. Most people actually said they were happier when they learned how live more simply. I can totally relate with that as I had my own financial crisis when in 1991 when my first child was born. I had to take a year off work so I lost my income and company car at the same time. I had to quickly learn what I could live without and I found that there were many things I really did not need to spend on. In our house we now follow the motto of the famous architect Ludwig Mies van der Rohe which is “Less is More“. I love his simple architectural style and was lucky to see a number of his beautiful buildings when I lived in Chicago, and that is the kind of style that we aspire to achieve with our lives.

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