Economy Question....Are we in a catch 22???

[brig2221]

I have become a really big fan over the last year of Dave Ramsey, and just the entire financial ideology of spending less than you earn, and saving money.

Here is my question. Is our economy caught up in a catch 22 situation that is eventually doomed to implode?

Let's say that the country and most all of us living in it finally wake up one day and embrace the spend less than you make ideology. What would be the greater economic implications of that happening? Millions of people cutting up credit cards, paying off debt, not taking on additional high interest financing. Millions choosing to keep their car for another 3-4 years instead of purchasing or leasing a new car. Millions of people choosing to buy used cars instead of new cars. Forgoing the purchase of the Plasma TV and just about every luxury item you can think of in order to save money for retirement and emergency funds. I'm not talking about every man woman and child here, just a good chunk of the population. If that were to happen, wouldn't the inevitable consequence be our economy cratering, and if the economy were to crater based on all these things, wouldn't millions lose their jobs due to the poor economy, lack of demand, and lack of consumer spending? Wouldn't the same people who changed their ways and started spending less than they earn get burned in the end by losing their jobs and most likely their investments due to the economy cratering?

On the flip side, lets say the country continues down the current path of financing everything under the sun, spending more each year than they earn. You can only delay the financial implications of this type of behavior and spending for only so long. Eventually it will catch up with us, and you will see the economy crater.

That is the catch-22. We change our ways in great numbers and start acting financially responsible, our economy craters. We don't change anything, and eventually the same thing will happen under the burden of all that debt.

It seems to me the only way to keep things going fairly smoothly without a big economic correction would be to have a balance consisting of a majority of the people who spend spend spend, and then a small minority that save and build wealth. Am I missing something here? To me, the writing is clearly written on the wall, we are on our way to another Great Depression in our lifetime, and when it happens, it will catch a majority of the population by complete surprise.

[dbarrett5381]

Re: Economy Question....Are we in a catch 22???

I am also trying to follow Dave Ramseys money teachings. It is funny because I was thinking the same thing yesterday. I also wonder what would happen if no one took out debt and payed off all of there old debt? Well I think that the economy would collapse. However I don't see that happening, because even though I am now trying to live frugally and do things for less money, there are still people out there that pay for services that I do myself for less. Like mowing my lawn. I do that myself for free but I know plenty of people that pay people to do it because they don't want to be "bothered" with doing it themselves. I think borrowing money is the same way. There will always be a market for it, because some people just don't want to be "bothered" with having to wait longer to buy something while they save up cash for it. So in my opinion I always think that there will be a market for "broke" people. Oh yeah I am new here and this is my first post, so please be nice

[Ima saver]

Re: Economy Question....Are we in a catch 22???

Welcome, that was a very nice first post. I don't think we have to worry about the majority of americans becoming frugal too soon.

[creditcardfree]

Re: Economy Question....Are we in a catch 22???

So in my opinion I always think that there will be a market for "broke" people.

Dave Ramsey is banking on the fact that you are right. He has addressed this very issue on his radio show because a caller asked the same question. I'm paraphrasing and using my memory, but I think he feels that people with no debt are more creative and inventive. Those people (all people) would then use their extra cash to create jobs and businesses that others would use their extra cash to buy and that is what will keep the economy going.

Anyone with a book or a link can feel free to add or correct me if that is not Dave Ramsey's stance since I'm trying to remember a call from over a year ago.

Welcome to the boards, dbarrett5381!

[LuxLiving]

Re: Economy Question....Are we in a catch 22???

People who don't debt do a couple of things with it -- they either spend it, hoard it under their mattress, lend it (bank savings, MM, t-bills, etc.) or they invest it. Either way it isn't necessarily that we would all stop spending, but rather do as creditcardfree is suggesting - money would still circulate, but perhaps not as much to the CC companies pocket books.

[brig2221]

Re: Economy Question....Are we in a catch 22???

I'll buy a little bit into what you and Dave Ramsey are saying regarding the re-investment of capital back into the economy creating jobs, etc.

That said, there is still no doubt in my mind that you would see the largest recession in the last 50 years or more if a sizable section of the American taxpayers decided to close their wallets and purses. Again, imagine the impact on this economy and jobs if a significant amount of people started to keep their cars for 8-10 years at a time instead of leasing every two to three years or buying every 3-5 years. You would see half of the dealerships out there go belly up. I think you would see similar results in a lot of other industries.

[creditcardfree]

Re: Economy Question....Are we in a catch 22???

I'll buy a little bit into what you and Dave Ramsey are saying regarding the re-investment of capital back into the economy creating jobs, etc.

That said, there is still no doubt in my mind that you would see the largest recession in the last 50 years or more if a sizable section of the American taxpayers decided to close their wallets and purses. Again, imagine the impact on this economy and jobs if a significant amount of people started to keep their cars for 8-10 years at a time instead of leasing every two to three years or buying every 3-5 years. You would see half of the dealerships out there go belly up. I think you would see similar results in a lot of other industries.

But what other industries or business would gain when people keep their cars longer? Body shops, auto repair, and repair parts come to mind. What other industries benefit because people don't make lease payments, but have that cash to put elsewhere in the economy?

Just trying to spin your idea!

[kv968]

Re: Economy Question....Are we in a catch 22???

Dave Ramsey is banking on the fact that you are right. He has addressed this very issue on his radio show because a caller asked the same question. I'm paraphrasing and using my memory, but I think he feels that people with no debt are more creative and inventive. Those people (all people) would then use their extra cash to create jobs and businesses that others would use their extra cash to buy and that is what will keep the economy going.

Theoretically, this wouldn't work. I know you're paraphrasing but if that's the gist of it, it doesn't work. People may use their extra cash to create new businesses and products but since practically everyone is being frugal, why would anyone buy the new products?

Granted, either scenario (too much spending, not enough spending) is bad for the economy. That's why it's important for the Federal Reserve to be in tune to what's going on with the economy in order to impose measures to prevent such wide deviations.

[creditcardfree]

Re: Economy Question....Are we in a catch 22???

Theoretically, this wouldn't work. I know you're paraphrasing but if that's the gist of it, it doesn't work. People may use their extra cash to create new businesses and products but since practically everyone is being frugal, why would anyone buy the new products?

Granted, either scenario (too much spending, not enough spending) is bad for the economy. That's why it's important for the Federal Reserve to be in tune to what's going on with the economy in order to impose measures to prevent such wide deviations.

Dave Ramsey isn't necessarily one for being frugal unless it is the means to the end (getting out of debt). Once you are out of debt and stay out of debt one doesn't necessarily have to be frugal, but spend less than one earns.

Frugal does not equal used products.

I agree the Federal Reserve plays a crucial role and in fact would probably do quite a bit to avoid a depression. I saw a PBS show about the economist, Milton Freidman, and the show indicated the Federal Reserve failed the economy in the 1930's by not putting enough cash into the economy when it should have.

[disneysteve]

Re: Economy Question....Are we in a catch 22???

I think we would see shifts in our economy, but certainly not a collapse. As creditcardfree suggested, if folks keep their cars longer, that creates more demand for auto repair services. If people save more of their income, that creates more demand for investment services. If people increase their purchases of 2nd hand items, that spurs the need for more thrift and consignment shops.

I think you can tell something by looking at the folks who are currently frugal or thrifty. It isn't an all-or-nothing proposition. Living below your means doesn't mean you never spend any money. My wife and I (and our daughter) live well below our means. We currently save/invest 26% of our gross income. We are both driving cars that were bought used. Mine has 96K miles and hers has 85K and we aren't planning to replace either anytime soon. We shop at yard sales, thrift shops and flea markets on a fairly regular basis.

At the same time, though, we vacation about 3 weeks/year spending money on fuel, airfare, hotels, cruises, restaurants, tourist attractions, souvenirs, etc. We enjoy dining out and do so pretty often. And we spend money in various other ways, so even though we aren't wasteful with out money or out buying tons of luxury items, we still do our part to support the economy. Its just that we prioritize our spending differently than many others.

So if everyone suddenly became more thrifty, the economy would still roll along, though some sectors might suffer and other sectors might surge. Also, don't forget that what is "thrifty spending" for a couple earning $200,000/year might be viewed as "luxury spending" by a couple earning $50,000.

[kv968]

Re: Economy Question....Are we in a catch 22???

Frugal does not equal used products.

I'm not implying people wouldn't buy new products. I'm just saying, in the text of the argument, that just because people started new businesses with their "newly saved" money doesn't mean that others would use their "newly saved" money to support them. If they're currently saving money and not utilizing some of the businesses and products that currently exist, why would they spend more freely with newly created businesses that most likely offer nothing different? Hope that made sense.

I agree the Federal Reserve plays a crucial role and in fact would probably do quite a bit to avoid a depression. I saw a PBS show about the economist, Milton Freidman, and the show indicated the Federal Reserve failed the economy in the 1930's by not putting enough cash into the economy when it should have.

I started watching that show also but unfortunately I had to get to bed in order to get up early for work. Was it any good?

[Bookie]

Re: Economy Question....Are we in a catch 22???

And I quote from last year:

Actually, it would be amusing to watch the financial community's response to an outbreak of frugality on a national scale. it would be interpreted as a decliine in the consumer confidence index and a harbinger of recession. Share prices would fall as projected earnings estimates were trimmed quarter by quarter. Unemployment would rise with payroll trimming to reduce costs. Tax receipts would decline across the board, squeezing local and state governments that look to sales tax revenues.

Distress selling at every level would bring prices down, but consumers would delay major purchases in anticipation of further price cuts. The Fed would cut rates to encourage borrowing at every level. Frugal consumers would penalize savings institutions that followed suit by shifting balances in search of higher returns, thus putting pressure on the banking industry already facing mounting debt liquidation and idle reserves.

Trading pardners abroad would panic as American imports fell, wiping out markets on which they had built their hopes. Loan defaults around the globe would trigger financial panic. Billions in inflated asset values would simply disappear in a deflationary spiral.

Interesting to contemplate.

[boefixepa]

Re: Economy Question....Are we in a catch 22???

Also keep in mind that this shift would likely happen over time. A big chunck of the nation is not going to shift their views and change their habits overnight. It will be gradual change the market and economy would adjust likewise. Look at FORD and how hard they are working to change their product now that they have lost so much market share as people's preferences have changed over the last few decades. Short of some biblical calamity, I think changes would be done over a sizeable span of time. There may be short spikes like there was for 9/11 or Katerina, but the economy kept on moving.

[kv968]

Re: Economy Question....Are we in a catch 22???

Unfortuanetly, I think one side of the catch 22 is going to be avoided. By the looks of things, frugality isn't going to overcome us any time soon. Drowning in debt however seems like it may become a reality

[LuxLiving]

Re: Economy Question....Are we in a catch 22???

Have you guys have been reading Gary North again?????????

http://www.garynorth.com/