Background on the New Frugality

Here is some background on the idea of what I'm calling the New Frugality. It's a theme that explains much of what is going on with the economy.

First, a cover story by Mike Mandel for Business Week laid out the basic idea:

The Consumer Crunch
Recession or not, American families will be forced to tighten their belts

The long-awaited, long-feared consumer crunch may finally be here. That might not mean an economywide recession, but the pain for American households will be deep.

What comes next could be scary--the largest pullback in consumer spending in decades, perhaps as much as $200 billion to $300 billion, or 2%-3% of personal income. Reduced access to credit will combine with falling real estate values to hit poor and rich alike. "We're in uncharted territory," says David Rosenberg, chief North American economist at Merrill Lynch (MER ), who's forecasting a mild drop in consumer spending in the first half of 2008. "It's pretty rare we go through such a pronounced tightening in credit standards."

You can read the full story here.

I followed up with a story looking into the personal finance implications of thrift:

How to Survive the Credit Crunch
by Chris Farrell

Driving along the Interstate on the outskirts of Minnesota's Twin Cities, you can't miss the nation's largest mall. A massive citadel of consumerism, the Mall of America boasts some 520 stores in a space big enough to hold 32 Boeing 747s. Spend a few hours there and big numbers stop fazing you--numbers like the record $2.5 trillion in U.S. household debt, which rises to $13.6 trillion with mortgages tossed in. Bigger is better, you say, with a wink, charging that 52-inch flat-screen TV. Yet the credit crunch could mark a major turning point for the U.S. consumer economy. Half a century of spend-with-abandon attitude may be winding down. The shift won't come about because consumers embrace a new frugality. What's happening is that the average consumer now looks like a towering risk to the folks who extended all the debt--credit-card companies, mortgage lenders, and, most recently, student loan outfits. And those lenders are pulling back, making it harder to borrow.

That doesn't mean the Mall of America is going to empty out like New York City in the new Will Smith movie I Am Legend. But the fallout from tougher lending standards should be making you think about adjusting your financial strategy, from plotting your portfolio to figuring how you'll finance home purchases and college educations. Says Ross Levin, a certified financial planner and president of Accredited Investors in Edina, Minn.: "The implications are gigantic when it comes to personal finance."

You can read about those implications for home ownership, stocks, bonds, credit cards and student loans here.

The New York Times caught up with the idea earlier this week:

Economy Fitful, Americans Start to Pay as They Go
By PETER S. GOODMAN
For more than half a century, Americans have proved staggeringly resourceful at finding new ways to spend money.

"The long collapse in the United States savings rate is over," said Ethan S. Harris, chief United States economist for Lehman Brothers. "People are going to start saving the old-fashioned way, rather than letting the stock market and rising home values do it for them."

You can check out the rest of the story here.

I'll keep an eye out for further evidence of a sea-change in consumer borrowing behavior and signs of increased savings. Send me any evidence you have that consumers are embracing the New Frugality--or perhaps I should call it the forced embrace of the New Frugality.