The Economy: I Want YOU to Spend Your Money

Capitol Hill is frustrated with Americans because we’re saving money, paying down debt, and not spending. How dare we!

For two months our government has been scrambling to ease credit markets frozen by a bundle of bad mortgages. But if banks lend again, the thinking goes, we Americans can resume buying stuff indiscriminately, thereby saving our economy.

I’m not an economist, and maybe the fact that I’m ignorant of some major economic principle is why I don’t understand. But when you have a government in more than 10 trillion dollars of debt, a “buy now, pay later” consumer culture, and a personal savings rate of less than three percent, how can spending more—going into more debt—possibly help the national economy in the long run?

Short term, I understand. Ease credit markets, give people new zero percent credit cards, sub-five percent mortgages, and tax rebates, and we’ll all start buying houses, cars, and other big ticket items. When we shop, businesses do well. When businesses do well, people get jobs. When people get jobs, more people shop.

But long term, this can’t be sustainable, can it? Eventually we all have to pay back what we owe. And it’s hard to keep buying when we’re repaying—as individuals and as a nation.

What do you think? Do you agree? Do you know of reasons why more credit, more lending, more buying are the answer to a recession?

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some comments

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Rick 5 December 2008 at 11:13 am permalink

I wonder if the population’s increased rate of savings has helped any of the banks re-capitalize to a level where lending will soon be possible.

Another thought, I wonder if banks would be more likely to lend to small businesses if there were terms beyond the business’s repayment, some kind of equity in addition to terms? Essentially what the US Govt is doing with the TARP. Private equity’s too opaque, this could create confidence in lending and more responsible financing for businesses.

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Hank 7 December 2008 at 10:07 am permalink

You shouldn’t think of it as you spending say $1,000 on a new TV at a retailer and the money only benefiting that retailer. Your $1,000 of new money inserted into the “system” will make a circuit helping a host of other companies (wholesalers, parts manufacturers, etc.) who will use that money to pay employees, suppliers, etc. It is classic trickle down theory. Your money infusion will help many others as it is used over and over again.

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Live for Improvement 8 December 2008 at 4:10 pm permalink

I think U.S. population is starting to realize the importance of personal finance. This is a good thing. I don’t know the facts either, but it seems like the federal government is racking up a large debt on frivolous things. I would be interested to see how other countries budget their money, and whether they have deficits.
-Dan Malone-

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Jason 10 December 2008 at 1:05 pm permalink

As the save more, spend less attitude seeps into our culture, it seems to me that the economy will have shift into one that is less based on consumption.

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