Tight-Fisted Is Back In Style

It's an attitude that would have made World War II–era Britons proud. The economic state of the world has produced a grim new frugality in England, the likes of which haven't been seen since the end of food rationing in 1954. December retail sales showed same-store declines of 3.3 percent in what the British Retail Consortium said was the worst shopping season since it began keeping records in 1983. Sales would have been even more dismal if stores hadn't offered discounts that were the steepest (some slashed prices by 90 percent) and earliest in British retail history, according to a survey by PriceWaterhouseCoopers. In the same month, Britons bought 21 percent fewer cars than in the corresponding period of 2007, slashed their purchases of table water and champagne, and cut back purchases of clothing for the 14th month out of the last 15.

Among the few shops on High Street reporting increases: shoe menders, pawnbrokers and down-market discounters like the Aldi no-frills supermarket chain. The closing weeks of 2008 also saw the bankruptcies or financial collapse of no fewer than 10 big retail chains, from Woolworths to Zavvi, the former Virgin Megastores.

Applications for allotment gardens—small plots of land where city dwellers can grow their own food for a small fee—doubled in 2008 in cities like Warwick. On Amazon's U.K. Web site, bestsellers include "The Thrift Book," "Food for Free" and "The Penguin Handbook of Keeping Poultry and Rabbits on Scraps."

The shift to thrift is of course natural in hard times, as consumers worry about their jobs and shut their wallets amid the deepening gloom. This time, however, the clampdown on spending appears to be more than a sharp but temporary downturn of the economic cycle. In Britain, the U.S. and other consumer-driven economies, including Spain and Ireland, it seems to herald a much broader shift: the end of a way of life based on freewheeling consumption fueled by easy credit and the wealth effect of ever-rising asset values. Already, once spendthrift Americans have hiked their personal saving rate from near zero, where it's hovered for several years, to almost 3 percent in November. Merrill Lynch chief economist David Rosenberg expects the rate will soon rise to 8 percent and beyond, levels last seen 20 years ago. Just like overleveraged and undercapitalized banks, Rosenberg says, private households are now repairing their own balance sheets by spending less, saving more and paying off their debt. And just as in the financial industry, this is beginning to look less and less like a quick fix—and increasingly like a long-term change of habits.

Rosenberg and other economists who believe that thrift will be the new normal say long-term change will come on three fronts. First, the wealth destroyed in this recession looks likely to be so vast that it will force a change in behavior, much as World War II rationing or the Depression seared fears of scarcity into an entire generation. The second change is the death of a risky financial-sector business model that saw banks hand out ever more loans and pass them on to other investors as "assets." This in turn created huge floods of credit to pump into mortgages and other consumer debt, which bloated spending and real-estate values, but won't in the future. Third, because neither governments nor investors will tolerate a return to risky bubble-era practices, banks will have to relink credit to deposits and look more carefully where they lend. Bob McKee, analyst at Independent Strategy, a London investment consultancy, says this will slow down credit growth and funnel loans to companies that produce and invest, instead of to whiz-kid financial operations. All this is conducive to slow and steady growth—but not the huge run-up in asset prices of the credit-bubble era. It is therefore unlikely, says McKee, that asset values will return to their old levels and erase current wealth destruction any time soon.

The pressures forcing the new Age of Thrift are powerful: Americans alone watched their household wealth shrink by some $13 trillion in 2008, erasing a decade of gains. "In past deep recessions," says Peterson Institute economist William Cline, "households lost about 5 percent of their net worth, compared to 20 percent now." Losses are already twice as high as after the 2001 tech crash, and half as much as in the Great Depression. If the late era of stock-market gains created a "wealth effect" that made consumers feel rich and ready to spend, the collapse of wealth will produce the reverse.