Econowatch

When will things go back to normal? That is the only question that seems to matter: when will this strange and frightening episode pass? It’s a fair question, but not exactly the right one. What most really mean is: when will my house price begin soaring again? How long before my stocks triple? And when will I feel safe to max out my credit cards again? Over the past 15 years that became “normal,” or at least common. But that isn’t coming back soon.

The reality is, everything we see happening around us is part of the process of returning to normal. For the past decade or so the laws of financial gravity were suspended. Now they are back in force, and those who soared the highest have the furthest to fall.

It gets a little tiresome to listen to people extolling the virtues of “the new frugality.” It seems curmudgeonly at this point to mention that there is no law that says every middle-class family is entitled to an annual overseas vacation. Not long ago people could be expected to outnumber the TVs in a typical household, and teenagers actually had to ask to borrow the keys to the car (singular).

If that’s your definition of frugality, then fine. But there’s nothing “new” about it. We are simply rediscovering the lost art of saving.

For the past decade or so, Canadians (and, of course, Americans) saved barely any of our take-home pay. We didn’t need to. With home values appreciating by 10 per cent a year, and stocks rising even faster than that, there was little incentive to save. With interest rates below five per cent, debt was a better option than savings. But as TD Bank economist Diana Petramala noted in a report this week, Canadians saved over 15 per cent of their take-home pay back in the late ’70s and early ’80s. They feared inflation and soaring interest rates, so they put cash away for “rainy days.” We aren’t likely to return to the record 20 per cent savings rate of 1982, but our savings rate is now at a six-year high of 4.7 per cent, and it’s likely to climb as high as seven per cent for the next few years, she says.

Unemployment is going to be higher than we’ve been used to, and GDP growth will be modest. We’re going to take on less debt, we’re going to save more of our income, and yes, that means millions are going to trim their ideas of a decent lifestyle. But here’s Petramala’s kicker: “This will be a healthy trend for both households and the financial system.” The world isn’t ending. Call it frugality if you like. We used to call it sanity.

GRAPH OF THE WEEK: A world in hock

Global currency markets shook last week when Standard & Poor’s warned that the U.K. could lose its coveted AAA debt rating, sparking speculation that the U.S. could be next to be put on notice about its soaring debt levels. The IMF, meanwhile, said Canada has more room than any other G7 nation to increase government spending, its total debt-to-GDP ratio being a relatively modest 22 per cent.