I don’t consume much news.
Most news stories are overly negative (I end up being more worried after reading than I was before), overly sensationalized (I often feel like I am reading fictitious stories instead of real situations) and overly repetitive (there is so much overlap that I end up getting less and less information the more I read).
However, I do like to have a sense of what is going on in the world. People like to talk about the news and it is helpful to have a general idea about major events if someone brings them up in conversation. With that being said, I spend about 10 minutes browsing through Business Insider every morning. The other day, I came across this headline…
Given that I am currently reading The Black Swan by Nassim Taleb, I thought it was relevant to read the article.
Think of a swan. What is the first thing that comes to mind? I envision a white bird that glides along the water. Most swans are white, and most people have only seen white swans. But only seeing white swans does not confirm the nonexistence of black swans – the fact that there are actually black colored swans surprises people.
A black swan is a positive or negative event that is deemed improbable, yet causes massive consequences. Examples of actual black swan events include 9/11, and Black Monday (October 19, 1987, when stock markets around the world rapidly crashed).
The top 3 black swan events listed in the article that threaten to “rock global financial markets” are (1) Brexit (Britain’s exit from the Eurozone), (2) economic troubles in China, and (3)…wait for it…. US consumers saving more.
This report is saying that the third biggest risk to the global economy is people saving more. That’s crazy.
Living with less and only spending on things that make us happy are entrenched in the personal finance and minimalism communities online. By consuming less, we are able to save and invest more, thus benefiting more from the economic growth driven by everyone else spending every dollar they earn.
So what if more people started to increase their savings?
Small Fish, Big Pond
Taking one fish out of a big pond will not have a big impact on the pond’s ecosystem. But taking many fish out would.
One person not voting in a national election is not going to impact the result. But millions of people not voting could.
One person not spending is not going to impact economic growth (well maybe it could if that person is Bill Gates or Warren Buffet). But millions of people being frugal would.
The ramifications of mass frugality
So what if everyone was frugal? What if, starting today, everyone saved 10,20,30, 50% of their income?
If people stopped buying iPhones and iPods and iPads and Macbooks, then Apple’s stock price would decline. Likewise, if everyone decided to severely cut back on spending and not buy new clothes, or a new car, or [insert any discretionary purchase here], then yes, the stock market would take a hit given that consumer spending accounts for a large chunk of America’s Gross Domestic Product (GDP).
Simply put, if everyone suddenly became frugal, the economy would go to shits.
But this negative economic impact would be short term, says Mr. Money Mustache. In his post, “What if everyone became frugal?“, he argues that society would actually be better off in the long term if everyone saved and invested more:
“Only by sacrificing current consumption, can people put money into banks or share offerings, which end up in the hands of new and existing businesses who can then use that money to create new technology, factories, or human capital, allowing them to increase their productivity. Capital creates productivity, and productivity is the driver of our standard of living.”
“In the short term, a massive switch to frugality would cause an economic depression”, but the additional investment in the short term would (potentially) lead to an increase in long term productivity.
I drew a connection with this idea and getting a college education. I could have made an honest living by going straight into the workforce after high school. But I decided instead to invest in a university degree, with the hopes of increasing my earning potential significantly in the long term. In the short term, it would have been better for my overall net worth to not go to college, but the investment will (hopefully) reap dividends over the long term.
A large number people increasing their savings rate is a risk to the economy. So genuinely trying to help people (by getting out of debt and saving more) could have the inverse effect of making everyone worse off in the short term as a result of less spending.
If everyone was exposed to the personal finance & minimalism communities online, then the black swan event of consumers saving more and spending less could come to fruition. I can just picture the news headline if it did…
“Recession caused by…FRUGALITY”