A comment was left asking a question that many of us have wondered about:
Answer me this: I hear economists on TV talking about people not buying as many things which is part of the problem in our recession. Then I hear other people talking about people not saving enough. Which is it? Or a little bit of both?
Simply put, the lack of spending is a symptom while the lack of saving is one of the causes. Allow me to explain.
Imitation Wealth
I have a rich friend who is far more wealthy than I am. But thanks to my Visa Platinum, I can live the exact same lifestyle that he does—at least for a time. My imitation wealth will eventually run out and I will no longer be capable of living like my friend. In fact, I will be much worse off than in the beginning.
Now, think about all your neighbors and family members who have been living on imitation wealth for years. Think of the boats, cars, houses, vacations, and other luxury items that were bought using imitation wealth. Think about your state and federal government. They too have been operating on imitation wealth (think of how long you’ve been hearing about the national debt, budget deficits, and borrowing from China).
Eventually, imitation wealth runs out. It just so happens that millions and millions of people all ran out of imitation wealth at one time. How? I blame it on the Federal Reserve.
Saving Helps the Economy as Much as Spending
Unless you hide your money under a mattress, your savings are in a bank or some other investment fund. This saved money is not horded outside the economy. On the contrary it is loaned out and put to use in the economy. Saving your money stimulates the economy just as much as spending.
Addicted to Spending
Spending money we don’t have got us into this mess. Just like a drug addict who tries to fix his problems with more drugs, spending more money that we don’t have will only alleviate the pain temporarily. A spending overdose is likely.
The Fix
All the sexy solutions you hear about on CNN have about as much substance as Paris Hilton. Spending borrowed money will not fix the economy. Unfortunately, those *solutions* also seem to have Paris’ appeal. The real solution is simple and boring: live within your means, encourage your friends to do the same, and vote for politicians who will too (I know, few exist).
So if we need more REAL wealth instead of more imitation wealth, how do we get it? Through job creation? ‘H’ no! More on that soon.
Hey, thanks! Though I was secretly hoping that I needed to go shopping.
Well said!! That is a very accurate and understandable explanation for the problem we are now facing.
I understand your blaming the Fed, and they do deserve some blame. But in the end, we the people need to accept our share of the responsibility for racking up credit card debt, buying homes that we could not afford, and living well beyond our means.
The recession is the natural way to bring spending back to within reasonable expectation based on our GDP.
[...] like to compare the government’s spending habits to me or you living off a Visa card. So when I stumbled on to this illustration by Jess over at WallStats.com I had to [...]