Lately there have been quite a few blurbs in the news about whether or not the American economy is headed toward a recession. Many have been in denial of this fact, but I recently read an article that accepted this recession and suggested ways that consumers could safeguard against it. The main one being save your money, just in case you get laid off. However, this is awfully dumb. Well, not entirely dumb, if you did get laid off, it would be good to have money, entirely rational. On a micro scale. However, recession is a macro issue, and the falling rates of consumer confidence and thereby consumption only aggravate the recession.
According to many economists, economies are cyclical. So there will be expansionary periods, as well as recessionary periods. The latter generally coming about every 8-10 years. As defined by Campbell R. McConnell and Stanley L. Brue, in Economics- Principles, Problems, and Policies, recession is: A period of declinding real GDP (Gross Domestic Product, pretty much national output), accompanied by lower real income and higher unemployment. It's the "lower real income and higher unemployment" that causes people to want to save, however, that's not necessarily the best idea.
Historically, we've seen many recessions, the most widely-known being The Great Depression. Now, I'm sure that no one wants to see another Great Depression, and I'm with them. However, saving money and consuming less is not likely to prevent it. In truth, it's likely to push us closer to one. I'm not saying that a lack of spending caused The Great Depression, there were many other factors that I won't go into now, but if you think about it, it makes sense that less spending = more of a recession.
Why do firms lower wages or fire workers? Because they're bringing in less money. If your costs are the same, and your revenues drop due to less consumption, then your profit will drop too. Less profit means less money to hire and pay workers. Not to mention lowered consumption is lowered demand (through a change in consumer expectations, and a higher propensity to save). If there's less demand then the firms will produce less supply, they don't want a surplus. So essentially, the notion that saving money in order to safeguard your own interests actually hurts the economy as a whole.
The point of this is, how about, instead of advising people to save and lead us into recession, we suggest that they continue to consume and we'll potentially be able to lessen the recession and its effects. Of course, this is coming from an AP econ. student who doesn't necessarily know everything, and doesn't really take into account the sub-prime mortgage issue which is also contributing to the recession, but I don't know much about that, so I'll leave this as it is.
Oh no! Not a recession!!!
By Danno. - Posted on March 10th, 2008
I love tossing the fact that of our 18 trillion dollar deficit President George Bush is responsible for printing 11 trillion of it. That's right PRINTING, not accruing, by war-mongering, corporate welfare, croneyism, but by printing more than half of what the next guy is going to inherit to try and figure out. Maybe I do want a scape goat for the next term. He or she is going to have a mess to work on. Or let if ride!
Where does the fact of 18 trillion dollar deficit come from? I can't find anything about it. I know that we're over 9 trillion in the red as a country... Can you link me a source please? This looks like something worth knowing about.
It is possible to save and spend at the same time. I have heard that the way many people became rich was by putting away tiny sums of money each month from the time that they had a first paycheck over years and years of interest this money adds up greatly. The same can be done to have a safety net in case of unemployment. You still have money for your essentials and a few non-essentials but you are putting away money all the same. Spend spend spend, consumers!
It just seems that if everyone is suggesting that savings is the best alternative, then there will be an ever-increasing amount of saving and less and less spending, throwing the whole thing out of whack. Everything, saving and spending included, should be done in moderation.
your right, we need to spend, but on domestic goods. thats why bush is giving us this tax stimulus cut. so hopefully people will go out and buy goods made in the glourious USA!
...with the stimulus plan is that it decreases consumer confidence and when that is decreased people will be less likely to spend. The majority of Americans are going to take their stimulus check and put it into an account to save 'til the recession gets worse.
I find it funny that people's instinct is to save a bunch of money when the value of the money itself is going down.
As for your above comments about the stimulus plan, I agree that it's flawed. It's either going to bank accounts or bills right off the bat. The scale of how much money that is going to be given out somewhat concerning considering the most likely outcomes of handing people money- they're collectively horde the money and not spend it or put it towards bills that they're desperate need to pay.
With the theory of the trickle down effect and money multiplier the stimulus plan is great, if people would only spend the money, but since people expect a recession they'll do exactly what you said, horde it. A little bit frustrating, not gonna lie.
yes. spending, and not fearing, is best for the economy. for personal well-being/security, saving is important. when we face a recession, it's hard to say how we're going to act, especially when we become effected on a personal level. Adam Smith says we musn't act for the economy as a whole, but how can we maintain the essential confidence for economic growth if we think only of the wounds we have experienced by a dwindling economy?
Your point is correct. The lack of spending mindset changes the velocity (or turnover) of money in the system. Thus, it does have a negative affect. However, an increase in saving decreases the interest rates charge on loans/investments and will encourage a borderline investor with a promising innovation to take a leap of faith. The problems is all in timing. Will the investment mechanisms move faster than the slowdown in velocity? Probably not.
Loved your point that "a lack of spending" is a recession. I laugh when most seasoned economists quote that the recession stems from a lack of consumer spending. That explains a lot to the average American!