NEW YORK — Five years after U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in major countries around the world are still 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 isn’t 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, through 2012. The focus was on the world’s 10 biggest economies – the United States, China, Japan, Germany, France, the United Kingdom, Brazil, Russia, Italy and India – which have half the world’s population and 65 percent of global gross domestic product.
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 4-1/2 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.
Spending slump: To cut debt and save more, people have reined in their spending. Adjusting for inflation, global consumer spending rose 1.6 percent a year during the five years after the crisis, according to PricewaterhouseCoopers, an accounting and consulting firm. That was about half the growth rate before the crisis, and only slightly more than the annual growth in population during those years.
Consumer spending is critically important because it accounts for more than 60 percent of GDP.
Holzhausen says the crisis taught people not to trust others with their money. “People want to get as much distance as possible from the financial system,” he says.
The crisis also taught them about the dangers of debt.
After the crisis hit, Jerry and Madeleine Bosco of Tujunga, Calif., found themselves facing $30,000 in credit card bills with no easy way to pay it off. They sold stocks, threw most of their cards in the trash, and stopped eating out and taking vacations.
Today, most of the debt is gone, but the lusher life of the boom years is a distant memory. “We had credit cards, and we didn’t worry about a thing,” Madeleine Bosco, 55, said.
In the United States, debt per adult soared 54 percent in the five years before the crisis. Then it plunged – down 12 percent in 4-1/2 years, although most of that resulted from people defaulting on loans.
“A whole new generation of adults has come of age in a time of diminished expectations,” says Mark Vitner, a senior economist at Wells Fargo, the fourth-largest U.S. bank. “They’re not likely to take on debt like those before them.”
Or spend as much.
After adjusting for inflation, Americans increased their spending in the five years after the crisis at one-quarter the rate before the crisis, according to PricewaterhouseCoopers.