I keep hearing news reports about how consumer spending is the key to fixing the economy. This idea is false; spending borrowed money will NOT fix the economy.
Imagine that I consistently spend more than I make. I have a home loan, a car loan, a boat loan, and multiple consumer credit cards. You’re already thinking, “Hey, that’s me.” or “Hey that’s my neighbor.” It’s not uncommon. I can maintain this lifestyle for as long as someone is willing to keep lending me more money. Soon enough, however, I will reach the limit of what people are willing to lend me and I will be forced to pay the debts I’ve accumulated. When this happens, my lifestyle is forced to change:
- My spending will be drastically reduced.
- I will have to work more.
- I might have to sell some things to reduce my debt.
- If I can’t pay my debts, for whatever reason, I might face bankruptcy and/or foreclosure.
Notice that I could never get myself out of this mess by spending more. The only solution is to spend less than I earn.
Thinking on a Large Scale
Now imagine what happens when thousands, or even millions spend just like me; they live on borrowed money. The economy booms (actually bubbles). Jobs are abundant. People spend like crazy. Just like my example, though, this type of living cannot go on forever. Eventually, debts have to be paid. When this point is reached, people are forced to adjust their lifestyle just like in my example:
- Spend Less.
- Work More.
- Sell things and reduce debt.
- Possibly face bankruptcy and/or foreclosure.
This is known as a recession. It’s how the economy corrects itself after we’ve been living on borrowed money. Just like in my example, the solution is to spend less than you earn.
Don’t buy into the garbage you hear on the news about how you need to go shopping to do your part in fixing the economy. Spending more borrowed money only worsens and prolongs the pain. Live within your means, and you will protect your personal economic liberty AND help fix the economy.
A Meaningful Christmas Without More Debt
Tags: depression, economy, force, recession
Ben,
You’re finding your voice on this blog and it’s awesome! I love reading you that much more now.
- Neal
[...] a degree in economics which means he’s so smart!! Because of this I am linking to a recent blog post he wrote explaining this myth. You should read it-he makes it simple and easy to [...]
This is stupid and basically untrue. Your personal debt functions like this but America’s debt is different. They don’t really have any intention of paying it back. they pay the interest and that is about it. We need spending because it will stimulate the aggregate demand in the economy. The limit should be that once the economy starts to recover, the govt. will wean down its spending and then maybe think about the debt. With the way you described everything, I would be surprised if you have a degree in economics let alone even went to college or took a high school economics class.
Zak,
You’re right, I never took a high school economics class. In fact, I’m a high school drop out. I did go to a few years of college, but none of it was necessary to see the fallacy of deficit spending. Yes, it stimulates the economy . . . for a time. But it’s no different than me getting a new Visa card to stimulate *my* economy.
Honestly Zak, have you ever seen the govt. *wean down spending* or *think about the debt*? Me neither.