It's Common Sense, Right

Presidents, Senators, Congressmen, Op-ed writers for the New York Times, and Americans of all varieties think they know what's best for the American Economy.  So, here's what we're told to do:  CONSUME!  SPEND!  Then pray that that kickstarts the economy.  I have my own ideas too as many of you know.

President Bush, after Katrina and after 9/11 told us to do our Patriotic duty and go shopping.  Obama told us essentially the same thing, though he didn't couch it as patriotism.  NYT columnist Paul Krugman suggested that 9/11 and Katrina both were blessings in disguise for the economy because it destroyed old stuff and made way for new stuff.  We'd all have to buy new stuff to replace what was lost.  After the initial stages of the financial meltdown, George W. Bush signed a temporary tax stimulus (favored by Obama as a Senator) and told us all to go out and spend our way to prosperity.

The theory goes, we spend money even so far as to go into debt to spend money and that money goes to businesses who then need to hire more workers, paying more payrolls, pushing more money into the economy which stimulates more spending which stimulates more hiring, etc etc.  How'd that work?  Not so good yet, right?

Let me ask you a question.  Are you wealthier if you spend everything you make and even go into debt spending or if you save as much as you can?  Are you wealthier if you have a well appointed home that is furnished and well stocked but no savings, no investments or if you live more modestly and have substantial savings and investments?  Many Americans have already found themselves in position #1 and bankruptcy filings are approaching record numbers for 2 years running.

So, if you're better off under position #2, where you save and are prepared for emergencies, why do you think the country as a whole would not be better off following the same advice? 

Let me ask another question, where do businesses get money to expand and grow?  If you said the banks, you are correct.  Where should they get money to expand and grow?  Investors.  Where do investments come from?  Savings.  So, if as a nation, we're consuming instead of investing, spending instead of saving, we're forcing our nation's businessmen to seek financing from the bank.  And, despite all the liquidity being provided by the Federal Reserve, we're told banks aren't lending.  Why not?  There are a number or reasons for this:  risk relative to prevailing rates, discount rates being held to near zero, lack of confidence, unwillingness to let go of reserves, a serious lack of qualified borrowers, and most relevant to this conversation no or too little savings and investment as collateral.

Before and during the Great Depression, the economic geniuses who prolonged that disaster encouraged people to spend as well.  People who saved money and assets were called Hoarders (only slightly more flattering than today's hoarders seen on reality tv shows) and hoarding was counted as a great societal evil, it was unpatriotic, selfish, wrongheaded, and contributing to the economic decline.  Too many people heeded that advice.  Based on the crowds at the shopping malls and the reports about Black Friday/Cyber Monday sales records, they still are heeding it. 

Will this spending spark a new economic boom?  I'd love to be wrong.  Just in case.  I think I'll save some more money this month.