Why Bad Times Breed Better Habits

While we suffer, we're also getting smarter - and more careful with our money

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Everybody’s getting poorer.

This year’s Forbes billionaire list includes just 793 worthies, down from 1,125 last year. And the overall list is a major sob story – 83 percent of the world’s billionaires lost money last year.

Down here in the middle-class, it’s just as depressing. The average American household lost 18 percent of its net worth in 2008, thanks to plunging real estate values and investment portfolios. The loss adds up to $11 trillion. And even though stocks have shown a bit of life lately, net worth is still going south in 2009, with stocks and home values both down a bundle for the year so far.

 [See why it's taking so long to fix the economy.]

Now for a schoolmarm moment: We need this.

Like it or not, bad times force us to learn better habits. We waste less, spend our money smarter, and become more responsible. And for all the pain, that’s already starting to happen this time around. Here’s how:

More saving. We all know that Americans love to spend and aren’t real motivated to save. For awhile in 2005 the nation’s personal savings rate was actually less than zero. That means consumers in the aggregate were spending more than they earned. Sure, that pumped up the economy, but we now know it was a bubble economy. A low savings rate also forces America to borrow from other countries to finance its future, which is unhealthy and probably unsustainable. And for consumers, raiding your savings to pay for cars, vacations and remodeling can be a disaster when something goes wrong – like when the value of your home stops rising and starts falling.

[See 5 things that could truly revive the markets.]

Many Americans are learning (or relearning) that lesson, and lo and behold, the savings rate is starting to go back up. In 2008 alone, it rose from nearly 0 at the beginning of the year to more than 3 percent at the end of the year. That’s the highest level since after 9-11. It’s probably rising even higher in 2009, since many Americans, worried about their jobs, are afraid to spend. It’s hard to say what an ideal savings rate is, but since World War II it’s ranged as high as 10 percent or so. These days, a 5 percent saving rate would be considered healthy. For consumers, a big cash cushion suddenly looks a lot better than equity in a home you can only sell for a loss.

Less debt. Obviously this goes hand-in-hand with higher savings, and as overextended consumers are saving more they’re also gradually paying down some of their debts. After rising for years, the amount of loans made to consumers for cars, appliances and everyday spending fell in the last quarter of 2008, and it barely ticked upward in January. The shift may be largely due to the difficulty getting loans, but it’s also clear that consumers are retrenching. Companies too. The massive “deleveraging” that economists keep talking about basically means that a lot of firms - banks and financial institutions especially - are paying down or writing off debts and increasing the amount of cash on hand. That’s good for stability (or so we hope).

[See 5 things that could truly revive the markets.]

More balanced trade. The U.S. trade deficit – the amount by which imported goods from other countries exceed the goods we export overseas – has fallen to its lowest level in six years. That’s because we’re using less oil – which is mostly imported – and buying a lot less stuff from China and other low-cost importers. A high trade deficit basically represents another way that the United States is in debt to the rest of the world. As the deficit falls, the dollar typically strengthens and the United States becomes a more appealing place for investors to put their money.

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More skepticism. Remember that old saying, let the buyer beware? Now we know why it’s survived since ancient times. We used to think that homes would always rise in value, that Alan Greenspan knew everything, that double-digit returns could be locked in forever. Now, after a dose of subprime meltdowns, massive bank losses, and Bernie Madoff, we know better. For awhile at least, it’s going to take a lot more than usual to get us to part with our money.