Monday Morning: Post-attack silver lining: Saving, frugality

It is becoming clearer every day that the Sept. 11 attacks on the World Trade Center and the Pentagon, followed by the anthrax attacks, have done more damage to the United States than Osama bin Laden and his fellow terrorists could have imagined, at least in the short run.

Unless he is far more economically and politically sophisticated than most of us can imagine, it’s hard to believe that bin Laden expected the attacks to dramatically slow the already weakening U.S. economy, that he foresaw a steep rise in unemployment, a drop in existing house sales and a dramatic drop in corporate capital goods spending.

Almost certainly, he saw no further than the slaughter of thousands of innocent victims in the twin towers and the Pentagon, and the horror that the attack would inflict on all Americans.

It is a small consolation to realize that, in the long run, the attacks may strengthen the U.S. economy. They have accelerated a reorientation of priorities within the United States that was beginning to take place but could easily have been aborted.

That reorientation was a slow shift from excessive spending by consumers to paying down debt and increasing savings, prompted by the slump in the stock market and especially in the tech stocks.

Individuals lived beyond their means for most of the 1990s. They spent on bigger homes and bigger and better sport utility vehicles, increasing to record levels their debt as a percentage of income. In part, they were able to do that because they could see the money piling up in their 401(k) plans as the equity markets boomed.

There was no need to save for retirement. The stock market was taking care of that. And if investors had some investments outside of a 401(k), they were even better off. They spent capital gains before they realized them.

Many had stock options from the companies they worked for, and when the options vested, boy would they be rich. Again, there was no need to save.

And there was no need for conservatism in the investments. Diversification didn’t work. It didn’t protect you from risk but from getting rich in the stock market. Bonds virtually disappeared from portfolios – even the portfolios of retirees.

The market slump after April 2000 had begun to change those attitudes. The stock market was now destroying rather than creating wealth. The accumulation of retirement assets without effort was not so sure.

Many of those stock options had expired worthless, and even worse, some employees found themselves with worthless stocks and huge tax obligations. People had begun paying down credit card debt and increasing their savings.

The shock of the attacks confirmed and accelerated the trends. It no longer seems important or prudent to go into debt to buy the latest SUV. Debt repayment has accelerated as individuals try to get their personal balance sheets in order, perhaps in part because of fear of unemployment.

I predict that within the next six months, official figures will reflect a significant increase in the personal savings rate, even as unemployment increases. Individuals now will have to save to rebuild their financial resources, and especially to accumulate retirement assets. It may even become fashionable to be frugal.

Corporations also are attempting to strengthen their balance sheets, cutting back on borrowing.

Suddenly it’s no longer old-fashioned to build some conservatism into investment portfolios. Bond mutual funds are back in favor.

How long those attitudinal changes last will depend on how long the economic recovery takes. Analysts argue over whether this will be a V- or U-shaped recovery. If it is a V, changes in attitudes are unlikely to be permanent. If it is a U, there is a better chance that any changes in attitudes toward spending, saving and investing will last longer.

A U may be more painful, but it would be better in the long run. It may mean that the terrorist attacks will have produced the same kind of seminal changes in attitudes toward saving as the Great Depression produced on its generations, without so much economic pain. And it’s beginning to look a lot like a U.

Mike Clowes is the editorial director of InvestmentNews.