A paradox

[Actor]

Sometime after the current recession began there was someone on TV, I don't recall who, who said that people needed to spend to stimulate the economy. The speaker also stated that such behavior was probably not in an individuals best interest.

For several years I've held the opinion (which I cannot prove) that if everyone were thrifty, saved and invested for their future, and in general behaved in a fiscally responsible manner, that the economy would collapse. Capitalism needs a certain population of "live for today" types in order to function.

[HUSKER55]

You would be correct. If everyone worked for minimum wage then no one can do anything. Nobody goes anywhere on minimum wage.

[Overlay]

Sometime after the current recession began there was someone on TV, I don't recall who, who said that people needed to spend to stimulate the economy. The speaker also stated that such behavior was probably not in an individuals best interest.

For several years I've held the opinion (which I cannot prove) that if everyone were thrifty, saved and invested for their future, and in general behaved in a fiscally responsible manner, that the economy would collapse. Capitalism needs a certain population of "live for today" types in order to function.
Wouldn't it be the institutions where the individuals deposit their saved money (such as banks) that do the "today" spending by loaning those pooled savings to finance current projects that individuals by themselves would not have the assets to fund, and that make their own profit in turn by charging a higher rate of interest for the loan of the money than they pay out to the individual savers?

[Actor]

You would be correct. If everyone worked for minimum wage then no one can do anything. Nobody goes anywhere on minimum wage.I'm not talking about people who make minimum wage; I'm talking about all levels of income except possibly the very rich. People spend a lot of money on things they don't need. It's no great secret that millions have amassed huge credit card debt they either can't handle or have difficulty with. I'm saying that this deficit spending by the public drives the economy.

[Actor]

Wouldn't it be the institutions where the individuals deposit their saved money (such as banks) that do the "today" spending by loaning those pooled savings to finance current projects that individuals by themselves would not have the assets to fund, and that make their own profit in turn by charging a higher rate of interest for the loan of the money than they pay out to the individual savers?Sorry, but I don't quite follow what you are saying. :confused:

[Overlay]

Sorry, but I don't quite follow what you are saying. :confused:
You said:
Capitalism needs a certain population of "live for today" types in order to function.
I'm saying that, in an environment where individuals are saving their money, the "live for today" types that you refer to are banks, which use the savings of their individual depositors to finance and invest in activities that will stimulate the economy, and that individuals by themselves could not afford to pay for (at least all at once) or support, such as the purchase of cars and homes (which others have to manufacture/build to meet demand), and the start-up of businesses.

[GameTheory]

You are talking about the "paradox of thrift" and it is a total crock -- Keynesian crap. It is just the sort of muddled thinking that has caused all of these big economic problems. Keynes managed to convince generations of economists that there was a fundamental difference between micro and macro behavior in the economy, but there isn't. Politicians gobbled it up because the theory cedes them power to manage the economy with central banking with the idea that is necessary and good to do so. How many booms and busts must we have before we realize that the whole idea is bunk?

[Mike at A+]

Capitalism needs a certain population of "live for today" types in order to function.
Well thank the Lord for the Michele Obamas of society! Spend baby spend!

[Actor]

You said:

I'm saying that, in an environment where individuals are saving their money, the "live for today" types that you refer to are banks, which use the savings of their individual depositors to finance and invest in activities that will stimulate the economy, and that individuals by themselves could not afford to pay for (at least all at once) or support, such as the purchase of cars and homes (which others have to manufacture/build to meet demand), and the start-up of businesses.Interesting concept. However, would not a truly thrifty person limit his use of credit? Borrowing money to buy a house is a thrifty move, given that one's choice is to pay a mortgage or to pay rent, i.e., you either rent your house or you rent the money to own your own. In the long run the mortgage is the thrifty move.

As for the purchase of a car a truly thrifty person would take the bus or subway. If no such existed in his city he would clamor for the city to build one. Failing that he would purchase a used car for cash and drive that until he had saved enough to buy a new one. Or he would buy a car on credit only once in a lifetime, using savings to purchase all subsequent vehicles.

My point is that the market seems to depend on people who overindulge in deficit spending. So much of the economy seems to devoted to the production of things no one really needs. Who really needs an SUV in lieu of a compact. Who really needs a cell phone, or a computer, or a digital TV. Of course there is tremendous peer pressure, social pressure, advertising pressure and in some cases pressure from one's employer to own these things, but does anyone really need them.

When I was in college I bought a simple calculator on credit. Did I really need it? Probably not, but given that using calculators during exams was allowed, even encouraged, I was under pressure to own one.

The calculator cost me $100, probably $500 in today's money. I actually took out a loan to buy the calculator. These days you would be expected to use a credit card. Of course these days you can buy the same calculator at Wal-Mart for $5.

[HUSKER55]

Actor

sorry, I misinterpreted your first statement.

defecit spending is like saying we can spend ourselves rich. If you think defecit spending will solve the economic crisis then who gets the bill and when does our national debt become zero?

If everyone paid off their credit cards then what would happen? Suppose there was no credit card debt in the USA right now. What would change?

Are you saying in that case everyone should max their credit to get the ball rolling? I think we have done that and it is not working.

after the last wall street fiasco I don't think any lending institution is going to do anything until they get their house in order.

Do you see that happening anytime soon?

[ArlJim78]

yes artificial bubbles can drive growth, for awhile anyway until the bubble bursts.
we've had deficit spending and stimulus up the wazoo the last several years. are we seeing a thriving economy? no.

we need to clear the bad debt before we can get back to nomal. we can't clear that debt if people are spending every penny and then some. we need savers now more than spenders. of course we're not likely to see much saving going on with such low rates.

[boxcar]

Interesting concept. However, would not a truly thrifty person limit his use of credit? Borrowing money to buy a house is a thrifty move, given that one's choice is to pay a mortgage or to pay rent, i.e., you either rent your house or you rent the money to own your own. In the long run the mortgage is the thrifty move.

As for the purchase of a car a truly thrifty person would take the bus or subway. If no such existed in his city he would clamor for the city to build one. Failing that he would purchase a used car for cash and drive that until he had saved enough to buy a new one. Or he would buy a car on credit only once in a lifetime, using savings to purchase all subsequent vehicles.

My point is that the market seems to depend on people who overindulge in deficit spending. So much of the economy seems to devoted to the production of things no one really needs. Who really needs an SUV in lieu of a compact. Who really needs a cell phone, or a computer, or a digital TV. Of course there is tremendous peer pressure, social pressure, advertising pressure and in some cases pressure from one's employer to own these things, but does anyone really need them.

When I was in college I bought a simple calculator on credit. Did I really need it? Probably not, but given that using calculators during exams was allowed, even encouraged, I was under pressure to own one.

The calculator cost me $100, probably $500 in today's money. I actually took out a loan to buy the calculator. These days you would be expected to use a credit card. Of course these days you can buy the same calculator at Wal-Mart for $5.

The Law of Means universally drives individual spending for the most part. (The operative phrase is bolded, btw.) Reasonable and responsible people tend to spend within their means, instead of beyond of it. (Too bad government does not see the wisdom in this philosophy.) And this is why it is good for the economy of the nation, in general, for government to create an economic environment that would encourage and foster personal growth (wealth). The more wealth different people earn and accumulate, the more money they have to spend within their particular means. They more money they spend, the more of a demand for goods and services they create, which in turn will create jobs, start-up businesses, etc.

Currently, confidence in the economy is very weak which accounts for the reluctance of people to spend and why so many, instead, are saving.

Btw, what is the point to this thread? Do you advocate that individuals spend as recklessly as the government? Should individuals do as our fearless leaders do?

Boxcar

[Actor]

Actor

sorry, I misinterpreted your first statement.

defecit spending is like saying we can spend ourselves rich. If you think defecit spending will solve the economic crisis then who gets the bill and when does our national debt become zero?

If everyone paid off their credit cards then what would happen? Suppose there was no credit card debt in the USA right now. What would change?

Are you saying in that case everyone should max their credit to get the ball rolling? I think we have done that and it is not working.

after the last wall street fiasco I don't think any lending institution is going to do anything until they get their house in order.

Do you see that happening anytime soon?Let me preface my statement by stating that I am not advocating anything. I'm putting forth the following proposition.

The economy is driven by deficit spending, both private and government.

I think it's true but I can't prove it. I'm willing to be convinced otherwise. I even though I think it's true, I don't think it's always been true, or that it will necessarily remain true.

Of course the question immediately invites another: if it is true, is that a problem. I think not. Thus the whole question is academic and merely the basis for an interesting discussion.

So, for this thread only, my position is that of a struggling student who is simply trying to master the material. I retain the right to take positions of advocacy in other threads of course.

when does our national debt become zero? Apparently never. Our national debt was $75,000,000 on the day the first Congress was sworn in and, except for a short period during the Andrew Jackson administration, has never been zero. I think it's safe to say it will never get paid off. Today the debt is $15,000,000,000,000. That's an annual increase of 5.65%; more than the average inflation rate over the same period. Since 2000 it's been increasing at a rate of about 12%. The immediate problem is not the size of the debt or even that it's growing; it's the rate of growth.

who gets the billPrivate citizens get the bill for their credit card debt. Taxpayers get the bill for the government's debt.

defecit spending is like saying we can spend ourselves rich.Crazy as it seems "we can spend ourselves rich" may be true. At least that seems to be a tenant of Keynesian Theory. I'm still studying Keynes and am not ready to take a position.

If everyone paid off their credit cards then what would happen? Suppose there was no credit card debt in the USA right now. What would change?It appears that more and more Americans are paying off their credit cards, albeit one month at time, or are declaring bankruptcy. What's changed? Deficit spending in the private sector is down and the economy is in the tank.

after the last wall street fiasco I don't think any lending institution is going to do anything until they get their house in order.

Do you see that happening anytime soon?If by "their house" you mean Wall Street's house, then I agree. The banks are taking a "wait and see" position. And sadly I don't see that happening soon.

[BlueShoe]

For several years I've held the opinion (which I cannot prove) that if everyone were thrifty, saved and invested for their future, and in general behaved in a fiscally responsible manner, that the economy would collapse. Capitalism needs a certain population of "live for today" types in order to function.
My opinion is exactly the opposite, easy credit and "Me first, if I want it I will buy it, even if I cannot afford it" attitudes are largely responsible for the mess we are in. In the post World War II era economy up until about the mid or late 60's we were a country of savers and thrifty families, and the nation thrived. Then the Boomers grew up into young adulthood and decided that they had to have it all, and passed this mindset along to their children, and here we are today. Depending on whose numbers you use, the average family is said to have a credit card debt of between 5 and 10 thousand dollars, at what, 15 to 25% interest? Then they wonder why they cannot save anything for retirement and are in danger of losing their home. Of course the other side of the coin is the way our inept leaders have managed, or rather mismanaged, our economy and fiscal system. Today, savers have been severely savaged. With interest payed to savings in MM funds and CDs virtually at zero, the politicos have told us that we might as well, in fact must, spend what money we have on things we cannot afford because otherwise, it will not earn anything and may even become much less valuable.

[chickenhead]

Wouldn't it be the institutions where the individuals deposit their saved money (such as banks) that do the "today" spending by loaning those pooled savings to finance current projects that individuals by themselves would not have the assets to fund, and that make their own profit in turn by charging a higher rate of interest for the loan of the money than they pay out to the individual savers?

Classicly, and if increased savings are the only variable that changes, yes.

Around transition points like we just saw, this often breaks down and that is where problems occur.

In that banks are unable to lend it out -- as their assets (value of existing loans) diminish those increased savings are need to keep capital ratios the same -- i.e. more savings are required just to keep their existing loans, the ratio that can be lended shrinks.

Coincident with that -- demand for loans shrinks as the balance sheets of the people and institutions that do the borrowing, development companies, homebuilders, commercial real estate investment firms -- are ravaged. This is also why the power of interest rates completely break down, they matter so much less than normal, as can be seen on both the savings side and the lending side.

So almost by necessity when reversing from over-leveraged to less leveraged increased savings are coincident with less ability to lend, and less demand for lending, in total disregard of interest rates -- which are the thing that are supposed to (and usually do) govern all of this.

The goal of course should be to keep big leverage swings from occuring in the first place.

[DJofSD]

Sometime after the current recession began there was someone on TV, I don't recall who, who said that people needed to spend to stimulate the economy. The speaker also stated that such behavior was probably not in an individuals best interest.

For several years I've held the opinion (which I cannot prove) that if everyone were thrifty, saved and invested for their future, and in general behaved in a fiscally responsible manner, that the economy would collapse. Capitalism needs a certain population of "live for today" types in order to function.
A very large percentage of the US economy is consumer spending. Something like 60%. A break down of that will show you what is called descretionary spending. Even if you eliminate the descretionary spending people will still be buying food and clothing, paying for shelter. Granted, it would not be as robust if folks were spending all of their available cash on lattes, video games and the such but there would still be monies being spent to purchase good and services.