Source: stck.xchng Photo: lusi

Source: stck.xchng Photo: lusi

What is best to help the economy? Should we spend or save money? We are getting mixed messages. We are trying to make rational choices in this economic downturn; which is to trim unnecessary expenses, conserve cash and boost our savings. As a country, we have so far done a really lamentable job of savings. If we were as fiscally conservative out of habit 5 years ago, as we are out of necessity today, maybe we would have bought smaller houses, drove our cars longer, charged less on our credit cards. The foreclosure problem would not have been as bad as it is now, the banks could have had more deposit capital (although they may still have made unfortunate and speculative investments). Lack of savings and over leverage in the past due to free flowing consumer credit is a significant reason for the current malaise. But we see religion now and are desperately trying to up the savings ante. However, we are also constantly bombarded with messages coming from the government and the media that the economic recovery will not arrive unless the consumer starts spending. The stimulus checks issued last year was to boost consumer spending. The tax cuts and credits for first home purchase in the current stimulus package are also meant to boost consumer spending. The thought is that as consumers buy more, the corporations will start producing more, increasing profits, adding new jobs, etc and that is what will start the recovery. We have always been told that a good and patriotic American spends and consumes and that is the only way to maintain the lifestyle and standard of living that we¬† are accustomed to. And now, there is also a new push in the congress to encourage ‘buy American’.

So what is the right thing to do? What should a good patriotic American do?

I have three observations that can help us make these choices.

  1. You can’t fight the aftermath of a credit bubble by spending our way out of it. This is laying the foundation for the next credit bubble. We can build a stronger economic foundation for the country as a whole if our individual or family economic foundation is strong. This would of course means save. Save what you can, cut out the unnecessary expense. Plan, build a budget and stick to it or even improve it. Get out of debt first. Build up your emergency fund. Discuss money in the family. Work multiple jobs if need to.
  2. As a nation, we are aging. We have a massive wave of retirements coming on the horizon. Many of these retirees have seen their savings dwindle in this recession. As a country, we have a tough future ahead where we face tough choices on how to take care of our population. Many of us will find ourselves in a position to not only needing to support our own families but also our aging relatives. And frankly, we will not be able to depend on social security for our own retirements. It may not be around.
  3. Consider the nature of this downturn. Even if the demand picks up if consumer spending opens up, many companies will still struggle to ramp up production because the credit markets are frozen. Regardless of whatever savings vehicle you choose (savings accounts, CDs, money markets, bonds, etc), they all work to create liquidity in the credit markets. Increasing savings may still be the best way to jump start the economy. Heck, we can even lend to the government and buy treasuries thereby reducing our dependence on Chinese debt.

Let us hear your thoughts. What do you think is better, spending or saving?