This is the first in a two part series on what the country would look like if everyone suddenly became financially responsible (click here to read Part II).  If this is your first time visiting Centsability to Wealth you may want to see what we are about or read our introductory post.

Every day on Centsability to Wealth we discuss being financially responsible.  From living within your means to paying off debt to saving for retirement, all of us here are striving to be as responsible with our money as we possibly can.  But what if everyone became financially responsible?  Specifically, what if everyone in the United States did the following:

  • Paid off the entire balance of their credit card each month.
  • Saved at least 10 percent of their income towards retirement.
  • Built an adequate emergency fund.
  • Bought only what they could afford.

Could Capitalism survive on a population of “savers”?  In a two part series we will examine what the country would look like after such a transformation.  Today we will discuss the short-term, tomorrow we will look at the long-term.  Keep in mind that the results I talk about are based strictly on my opinion and are entirely hypothetical.

Short-term- The Collapse of the US Economy

The short-term consequences of a nation suddenly shifting to being “thrifty”, especially one like ours that has been based so much on spending and debt for so long, would be massive and felt in nearly every sector. 

Unemployment

First and foremost, unemployment would rise to Great Depression levels or higher.  Several industries that employ massive amounts of people would be wiped out by a nation of responsible spenders.  Here are some of the industries most effected:

  • Credit Card Companies- Since people are no longer carrying credit card debt, the only profits credit card companies are making are the two percent merchant transaction fees.  They are forced to either drastically change the way they do business, or go completely under.  Either way, enormous amounts of people lose their jobs.
  • Pay Day Lenders- This industry thrives off the financially irresponsible, charging triple digit interest rates in order to help people spending beyond their means continue living pay check to pay check.  So when the nation shifts to saving and investing, they are completely wiped out.  And for a business growing faster than fast food restaurants, this means another gigantic hit to unemployment.
  • Auto Industry- Already hanging by a thread, the new, frugal version of America puts the nail in the coffin for the auto industry.  With people now waiting five to seven years before buying a new car, and mostly going for used cars when they do buy, auto manufacturers are forced to drastically cut production and lay off significantly more people.
  • Fast Food Restuarants- With people scrambling to cut expenses anywhere they can, they start packing lunches for work and cutting out trips through McDonalds drive through.  The fast food industry is forced to close large numbers of restaurants and yet more jobs are lost.

The Housing Market

After seeing millions of jobs lost, an historically bad housing market sees the bottom completely drop out.  Not only do foreclosures begin to double and triple, the renting market also falls out.

As a result of losing their jobs, people can no longer afford to rent homes, much less buy them.  The number of homeless people rises to an all-time high and the lack of home buyers and renters pushes the job losses even higher in the housing sector.

Soon, it is not uncommon to see entire neighborhoods vacant.

Crime

With job losses through the roof, and so many people now fighting to survive, crime rates begin to significantly rise.  While this does create a temporary increase in law enforcement jobs, it also deepens the economic woes severely.

People who are already not going out as much due to being more responsible with their money nearly stop going out all together as the threat of crime increases.  Even less money is spent, and you guessed it, more job loss.

The unbelievable number of people who are now homeless are forced to break into vacant houses and cars in an attempt to survive.  Looting becomes more and more common as stealing becomes some peoples only way to eat.

Taxes

The large increase in law enforcement needed to fight the rise in crime causes the first wave of tax increases.

Next, the massive amounts of people collecting unemployment benefits forces a further hike in the tax rate.  When unemployment can no longer support the unemployed, the government is forced to create more assistance programs, and again raise taxes.

Soon, those fortunate enough to have a job are lucky to be taking home 50 percent of their pay after taxes.

Summing Up

In short, the short-term effects of the entire nation become financially responsible are devastating.  The level of unemployment alone could be enough to break the economies back for good.  Those who do survive the job cuts are forced to spend a huge portion of their salary supporting those who weren’t.  The threat of crime eliminates most venues of entertainment outside the home.

Tomorrow we will look at what the long-term future of the new economy would look like if we were able to survive the horrific short-term.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com.

 

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