Debt is what fuels our economy

[Slandgie]

I drive for a living and while on a long 300 mile drive, I have a LOT of time to think about things.

I think most of us would agree that consumer spending is the main component in what drives our economy. I have heard that 2/3 of our national economy is derived from consumer spending. I also believe it is safe to assume that a large portion of the American public have spent more than what they have made over the past 20 years or so. That's how so many of us have gotten into this pickle!

I know that not every American will all of a sudden become a penny-pinching, living below their means consumer...that isn't realistic.

Because of the recession the past couple of years (some would argue that we are now officially out of the recession, but try telling that to some of my unemployed friends!), many Americans have begun saving money and paying down their debt.

Here is a quote that I think backs this theory:

"...official U.S. savings rate near zero for much of the time from 2005 through early 2008. The rate was just 0.4% in 2007. Given the economy's crash, many people clearly have gotten religion about saving money, if they're at all able to do so. The savings rate for April 2009 stands at 5.6%..." (LA Times, June 27, 2009)

So if more and more Americans are saving more and/or paying down debt, wouldn't this put a damper on the so-called economic recovery? If fewer dollars are being spent on goods and services, wouldn't this cause unemployment to go even higher?

[jIM_Ohio]

I agree consumer spending drives a good chunk of the economy, but higher savings is too much of a leap as to why the consumer spending will not happen

So if more and more Americans are saving more and/or paying down debt, wouldn't this put a damper on the so-called economic recovery?

Here is my 2 part theory
1) the economy requires that people borrow money to keep it moving (growing)
2) people consume based on confidence and stop spending (saving) when confidence is low

We are in this problem because banks are not lending money, which means small businesses cannot function (a great example of this is my doctor's office only had 100 H1N1 flu shots... meaning they could not buy more because they did not have the credit to do so).

These small businesses employ people (and lay off people) in volatile cycles based on their pipeline of business. Because businesses cannot borrow to spend on both salaries and other business to business commerce, any
"business to business" type industry (think housing contractors, consultants and similar) will be slow/low growth (possibly contract) and any consumer driven industry will either be OK (think grocery stores and soap and food companies) or be down (movies, restaurants, malls, clothing).

If banks start lending money again, you will see the economy start to improve.

[Mike75]

You are so right!

The banks and other loaners encourage people to take unrealistic loans which they can never return. Why? To keep billing them for interest for the rest of their life. It was one of the main reasons for the recent economic crash. But I don't think they have learnt anything from it.

[disneysteve]

(a great example of this is my doctor's office only had 100 H1N1 flu shots... meaning they could not buy more because they did not have the credit to do so).

Jim, I agree with the economic theory of your post but wanted to correct this bit of misinformation. How many H1N1 vaccines your doctor's office was able to get had nothing to do with how much credit they had. Unlike most vaccines that are purchased through private retailers, the H1N1 was/is distributed directly by the government. No matter how much money, cash or credit, I had, I could not call and order 1,000 doses even if I wanted to. When we placed our first order, we were limited to 100 even though we tried to order 300 and then 200. The order wouldn't go through (it is an online ordering system) until we lowered the request to 100.

[wincrasher]

I read an interesting article yesterday that reiterated that 70% of the economy is consumer spending. What surprised me is that the majority of this spending is by the "affluent", or top 10% of income earners.

Until these people are comfortable with spending, the economy is going nowhere. Part of what is holding them back is fear of being vilified for buying luxury goods.

[Broken Arrow]

OP, you're right. We have been a consumer economy for decades, going as far back as Reagan and Keynes.

I don't completely knock against the consumer economy (although I am against its current form). There isn't anything wrong with it in moderation. The problem was that America didn't take it in moderation. We went hog wild and passed out drunk with it.

And when it comes down to it, that's the quintessential problem: We lived beyond our means. We borrowed so much that many of us simply couldn't afford to pay it back. That's the reason why we're in this recession.

I'm hoping that America is finally sobering up. I hope that we will start a new chapter by living within our means. Just don't buy stuff we can't afford.

[Broken Arrow]

Until these people are comfortable with spending, the economy is going nowhere. Part of what is holding them back is fear of being vilified for buying luxury goods.

I read somewhere else that they're starting to go back into spending, but they're doing so discretely. If that is true, then it might be worth buying into luxury good stocks again. I don't know. But I guess that's a different topic for a different thread.

edit: Just stumbled across it again.

[Mike75]

OP, you're right. We have been a consumer economy for decades, going as far back as Reagan and Keynes.

I don't completely knock against the consumer economy (although I am against its current form). There isn't anything wrong with it in moderation. The problem was that America didn't take it in moderation. We went hog wild and passed out drunk with it.

I completely agree... Excess of everything is wrong and it has been proven in the current economic situation.