Go Ahead Back Up. Hey Man! Make Up Your Mind

Saturday, November 7, 2009, 9:56 AM | 5 Comments

Our parents told us and in turn we have been telling our kids to save. My son who just got a part-time job in a finance and invest company four weeks ago is spending his money from left to right. I keep telling him he’s gotta save the bulk of his earnings because he has no obligation to pay rent, utilities, etc. What is he spending on?

Is that a good advice? Since moving to the United States in the seventies, I have heard more than I care to remember that America was built on spending. That means the U.S. economy, and for that matter any nation’s economy, can grow by spending along with other stimulus in the economy, of course. But spending is a major part of it.

Have Americans started to save too much? Has a rainy day become too much of a scare in our lives? As it turns out, the economy doesn’t play by our parents’ rules.

Many economists tell us “spending is a necessary component of economic growth, accounting for roughly two-thirds of the gross domestic product (GDP).”

If American piggy banks get too heavy, growth – or, in this case, recovery – can come to a stand-still. Blah, blah, blah.

Americans are borrowing less. That’s apparent from a report by the Federal Reserve Bank. From the Fed’s chart, you can see that the amount of consumer credit outstanding contracted another $14.8 billion in September, following drops of $12 billion in August and $19 billion in July.

Revolving credit, which includes credit-card debt, is falling faster than non-revolving credit like car loans and mortgages, as consumers either pay down debt or find they can’t access as much credit as they once could.

Of course, many Americans have a lot more saving to do in order to repair their balance sheets after years of spending borrowed cash. But the unemployment rate, which reached 10.2% last month, may remain stubbornly high until, many economists tell us, consumers unlock their wallets and create some demand for goods and services. But if you don’t have a job, how can you unlock your wallet? Fasten your seat belts. We have a long way to go, baby!

In a Nutshell
In the end, I would say “Damned if I do, damned if I don’t.” In the short- and long-run, however, if we all took care of our families by spending a little and saving a little, I think the U.S. economy as a whole would do just fine.

So go ahead. When you get a paycheck, run straight to the bank and save it. Go ahead and run straight to the bank, withdraw money and spend it.

Say what? Hey man! Make up your mind. It’s like Abbott and Costello routine. In one instance, Abbott kept telling Costello – or is it the other way around? I always get confused between the two -, “Go ahead back up.” And Costello, being a nice guy, gets tired at one point and finally says “Will you make up your mind?”

Abbott and Costello “Go Ahead Back Up”

Abbott and Costello routine

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