There is no question that the economy is collapsing. From a Dow at nearly 14,000, we now have a Dow edging closer to the 5,000s. Hundreds of small lenders have gone out of business, a number of banks have failed, and numerous companies and industries have lined up for federal government bailout money. Both overspending and saving are being blamed for exacerbating the crisis.
But both of them can not be the problem at the same time, of course. The problem, it is said, is that spending has collapsed, people are saving money, and the economy is slowing down. Businesses like retailers and auto companies are slowing down or facing bankruptcy because people are putting their money in a bank instead of buying goods and services, and this depresses the economy.
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The government, certain economists, and banks seem to believe that people need to spend more money for a number of vague reasons: to “get the economy moving again,” “put people back to work,” “jumpstart consumer spending again,” and so on. But it is unclear what this really means and why spending is so evil during a recession.
There has even been a federal government stimulus package designed to spend nearly $800 billion, on top of the $8.5 trillion already spent or appropriated for spending by the government and the Federal Reserve private banking system. President Obama is even on record equating spending with stimulating the economy and has urged Americans not to “stuff money in their mattresses.”
On the other hand, more people are beginning to save their money, and the savings rate has risen from nearly 0% (which meant consumers were borrowing more money to spend than they were saving) to around 5%. Banks are even trying to entice people to save more money with better rates and incentives for saving.
In fact, some banks are even spending $100 of their own money to offer sign-up bonuses to people who are interested in establishing savings plans. Presumably, these are some of the same banks that have stated that a drop in consumer spending is what has caused the economy to fall into recession and urged the Congress to spend more money to rescue the financial system.
So which is it? The government is encouraging spending and taking over the role of overspent consumer by overspending itself. Banks are begging for more money from the federal government every month to save them from collapse, all the while offering incentives to Americans to save more money — which, according to banks and economists will further destroy the economy.
It would probably be a good idea for most people to ignore the arguments by economists, politicians, and business managers who are trying to convince us all which activity will spur economic growth and which will delay recovery even longer. Instead, people should use their own common sense and their own personal financial strategies, as well as look at what banks are doing — not just saying.
Homeowners who are realizing they have spent too much on their home, car, and other assets, and whose jobs may disappear at any second, have wisely begun saving more of their money. Every dollar saved will help establish a slightly larger emergency fund in the event that they do lose a job or face another type of financial hardship. This can only prevent more bankruptcies and foreclosures down the road.
Saving money in a bank (especially a local bank that focuses on local businesses) also helps stimulate the economy much more directly than either spending the money or having the government print the money into existence and just hand over to failing financial institutions. Instead, people can choose which financial institution at which to save their money and they will naturally prefer successful ones to failing ones.
Local or regional banks will also have a vested interest in paying higher rates of interest and competing for more local savers. This means that the smaller banks will make loans to local businesses which provide products and services and employ people in the community. Local economies that are strong have a much better chance operating in a regional, national, and global economy.
The local or federal government does not come into play in this scenario because there is no reason to force people to prop up a failing bank or take money through taxes or inflation to spend it into the economy. People and businesses naturally come together and receive mutual benefits when there is a reason to make a market more productive and wealthier.
Unfortunately, a lot of the problems of the past decade came from banks working with the government, instead of the people, to manipulate market interest rates, offer credit with artificially low underwriting standards, propping up inflated asset prices, encourage profligate spending, and then covering up the risk that anyone would recognize the whole scheme.
Markets can work when they are allowed to do so and are not given incentives to make even greater profits by utilizing government resources to manipulate economic indicators. Too many banks and financial firms were allowed to use laws and contradictory regulations to make huge profits on the way up for the banks and politicians, while setting up the people for impoverishment.
And now, in response to the crisis created by banks encouraging people to spend and government sending the wrong signal to the markets about spending, the politicians are relying on the opinions of bankers and economists who recommend more government spending and interest rate manipulations to continue rigging the economy. Eight and a half trillion have been spent so far — how much more is on the way?
Again, maybe it would be best to ignore all of the bloviating in Washington and on Wall Street, especially when lawyers, aka politicians, start talking about the market. It would be far better to start looking at what banks are doing, and right now they are encouraging savings. In fact, they are creating new programs and incentives to encourage more saving, not less.
People are saving more, and banks are competing for savings — the exact opposite of what “should” be done, according to the experts. Of course, these are the same experts whose recommendations first set up the housing market to inflate and then collapse, and who are now recommending that the same actions that created the mess will solve the problems.