October 7, 2013

Families worldwide hoard cash five years after crisis

The implications are huge: Shunning debt and spending less can be good for one family’s finances, but when hundreds of millions do it together, it can starve the global economy.

By Bernard Condon
The Associated Press

NEW YORK — They speak different languages, live in countries rich and poor, face horrible job markets and healthy ones. When it comes to money, though, they act as one: They’re holding tight to their cash, driven more by a fear of losing what they have than a desire to add to it.

click image to enlarge

Pradeep Kumar Yadav stands inside his embroidery factory in Varanasi, India, recently. Despite nearly two decades of rapid economic growth, most Indians are risk averse and do not own stocks.

The Associated Press

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This combination of photos from 2012-2013 shows from top left, a vegetable vendor counting rupees at a market in Allahabad, India, a shopper standing by a sale sign in London, a woman carrying bags with food in Barcelona, and a shopper browsing at a Sears store in Henderson, Nevada. An Associated Press analysis of households in the 10 biggest economies released on Oct. 6, 2013, shows that families continue to spend cautiously in the five years since the U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis.

The Associated Press

Five years after U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in countries as varied as the United States, Japan, the United Kingdom and Germany remain hunkered down, too spooked and distrustful to take chances with their money.

An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.

“It doesn’t take very much to destroy confidence, but it takes an awful lot to build it back,” says Ian Bright, senior economist at ING, a global bank based in Amsterdam. “The attitude toward risk is permanently reset.”

A flight to safety on such a global scale is unprecedented since the end of World War II.

The implications are huge: Shunning debt and spending less can be good for one family’s finances. When hundreds of millions do it together, it can starve the global economy.

Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. But even people with good jobs and little fear of losing them remain cautious.

“Lehman changed everything,” says Arne Holzhausen, a senior economist at global insurer Allianz, based in Munich. “It’s safety, safety, safety.”

The AP analyzed data showing what consumers did with their money in the five years before the Great Recession began in December 2007 and in the five years that followed, through the end of 2012. The focus was on the world’s 10 biggest economies — the U.S., China, Japan, Germany, France, the U.K., Brazil, Russia, Italy and India — which have half the world’s population and 65 percent of global gross domestic product.

Key findings:

— RETREAT FROM STOCKS: A desire for safety drove people to dump stocks, even as prices rocketed from crisis lows in early 2009. Investors in the top 10 countries pulled $1.1 trillion from stock mutual funds in the five years after the crisis, or 10 percent of their holdings at the start of that period, according to Lipper Inc., which tracks funds.

They put more even money into bond mutual funds — $1.3 trillion — even as interest payments on bonds plunged to record lows.

— SHUNNING DEBT: In the five years before the crisis, household debt in the 10 countries jumped 34 percent, according to Credit Suisse. Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 percent in the 4½ years after 2007. Economists say debt hasn’t fallen in sync like that since the end of World War II.

People chose to shed debt even as lenders slashed rates on loans to record lows. In normal times, that would have triggered an avalanche of borrowing.

— HOARDING CASH: Looking for safety for their money, households in the six biggest developed economies added $3.3 trillion, or 15 percent, to their cash holdings in the five years after the crisis, slightly more than they did in the five years before, according to the Organization for Economic Cooperation and Development.

The growth of cash is remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts.

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