Saving money is bad ???
I just don't freaking believe this. I'm.....I'm....speechless !!
Every time I read about how saving money is bad for the economy
my jaw drops.
when I was growing up in the 1950s and 60s, everybody
except the rich lived that way. Whether you made $5000.00
a year or 50,000 - it did not matter. People simply did not
spend their money on useless, overpriced stuff.
If you needed or wanted something you did not have, you
saved for it. Except for those on the extreme ends of the
economic spectrum, it was difficult to determine some ones
income by the clothes they wore, house they owned or
car they drove.
People shopped for a month at a time, had freezers to freeze
their food (and/or canned). As a kid, most of what you wore
or played with came from Sears or Montgomery Wards. And
the family car was a Chevy, Dodge, Plymouth or Ford.
And everybody used store coupons and had a garden of some
sort, even in the city. Eating out was for special occasions.
I did not know one kid in High School who ever got a new
car from "Daddy" for any reason. If they had a car, it was an
old one that they worked for themselves. Gated communities
were for the very rich, who were usually not home anyway.
So if the current economic situation brings this kind of sensible,
modest life style back - where people saved rather than spend
like a sailor - I say Bravo !!!
C
Every time I read about how saving money is bad for the economy
my jaw drops.
Rick and Noreen Capp recentlyAnd what pray tell is their flipping point ?? Listen....
reduced their credit-card debt,
opened a savings account and stopped
taking their two children to
restaurants. Jessica and Alan Muir
have started buying children's
clothes at steep markdowns,
splitting bulk-food purchases with
other families and gathering their
firewood instead of buying it for
$200 a cord.
As layoffs and store closures grip
Boise, these two local families hope
their newfound frugality will see
them through the economic downturn.
But this same thriftiness, embraced
by families across the U.S., is also
a major reason the downturn may not
soon end. Americans, fresh off a
decadeslong buying spree, are
finally saving more and spending
less -- just as the economy needs
their dollars the most.
when I was growing up in the 1950s and 60s, everybody
except the rich lived that way. Whether you made $5000.00
a year or 50,000 - it did not matter. People simply did not
spend their money on useless, overpriced stuff.
If you needed or wanted something you did not have, you
saved for it. Except for those on the extreme ends of the
economic spectrum, it was difficult to determine some ones
income by the clothes they wore, house they owned or
car they drove.
People shopped for a month at a time, had freezers to freeze
their food (and/or canned). As a kid, most of what you wore
or played with came from Sears or Montgomery Wards. And
the family car was a Chevy, Dodge, Plymouth or Ford.
And everybody used store coupons and had a garden of some
sort, even in the city. Eating out was for special occasions.
I did not know one kid in High School who ever got a new
car from "Daddy" for any reason. If they had a car, it was an
old one that they worked for themselves. Gated communities
were for the very rich, who were usually not home anyway.
So if the current economic situation brings this kind of sensible,
modest life style back - where people saved rather than spend
like a sailor - I say Bravo !!!
C
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I think you're missing the point. Nobody saved when times were good and now we're paying for it.
If people had saved more during the hey day when they actually had a job and a decent bonus then they wouldn't be so strapped now and cutting back on all non-essentials. But instead people spent every last dime and borrowed as much as they could against their homes.
Consumer spending is 2/3rds of GDP and we can't expect people to take their stimulus checks and go out and buy a flat screen or a new home. Instead they'll use it to paydown their credit card balances
January 6, 2009 8:27 PM | Reply | Permalink
Paying down credit card balances is a damned weak stimulus, but yes it does decrease interest payments which fund credit card companies and their investors ... a little bit.
Those who failed to save for a rainy day should pay now. As should those who loaned money for ridiculous mortgages. As should those who promoted the whole Ownership Society policy. As should those who gambled at the casino. Speaking of which, I've heard almost nothing about the trillions of CDS instruments which allegedly caused the crisis by making it impossible to know how much assets were worth.
Some of us have saved, btw. We resent your rude rhetoric. And we resent government gifts to wastrels. And we resent the gamblers and their counterparties.
Shifting from consumer spending to "other" is a good thing here.
January 6, 2009 8:59 PM | Reply | Permalink
I'm well aware of this. It was the insinuation that now these people are being forced to live a more frugal life, that they are some how hurting the the economy. When in fact it was this ostentatious life style financed by loosey goosey
credit that was (at least partially) responsible for our current mess.
C
January 6, 2009 9:57 PM | Reply | Permalink
I didn't read any insuation that the article put the blame on these people for not helping rescue the economy. The article was trying to make the point that we can stimulate and spend our way out of a recession. I think those are two very different points.
January 6, 2009 10:00 PM | Reply | Permalink
Bill - I read this article too (WSJ), and the headline actually said, "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes."
I think that's where the assumption that "saving is bad for the economy" came from.
http://online.wsj.com/article/SB123120525879656021.html
January 7, 2009 10:16 AM | Reply | Permalink
If the U.S. population hadn't been taught so carefully, so expertly, to be instant-gratification spenders at least some of the dislocation of this economic cycle would have been mitigated.
You note correctly that it's our own fault broadly speaking, but we have some very very powerful forces advocating for instant gratification and against long term thinking. I believe that mentality is present in a dangerously large fraction of the population, distributed uniformly among working class, management class, investor class and political class populations. So while Everybody is to blame, it's also true that we have a serious lack of leadership at all levels.
My wife and I have changed essentially nothing about our spending habits despite my losing a corporate job several years ago (and consequent doubling of work hours starting businesses in this economy...).
But we have been "bad for the economy" in the overspent-consumer sense our entire adult lives, being savers rather than spenders. The result is that we have some savings and continue with only minor adjustments despite the sharp reduction in income 4 years ago.
A bit of cushion, a bit of a rainy-day fund would come in very handy for America right now. So the question is how we recover the classical values of thrift and industry and the value of work, rather than the fake and temporal "value" of having more stuff than the Joneses?
January 6, 2009 10:21 PM | Reply | Permalink
Post rec'd.
You make some excellent points. Lower-middle class wages have been near-stagnant for years now and are not commensurate with the increased price of basic goods and services over the same time period.
I think what is often lost is the reality that, at this point, people have become so far behind in meeting their very basic needs (food, clothing, shelter, transportation, etc.) that they are held hostage to meeting those basic needs by frugality and saving, as opposed to more discretionary and frivolous spending that traditionally is expected to support the economy.
It often pisses me off to no end, the notion that our economy rises and falls based on the bulk of (middle-class) Americans spending beyond our basic core needs and, thus, we are pressured, if not compelled at the behest of others, to spend, spend, spend on non-necessities in order to prop up the economy.
But in an attempt to make lemonade out of lemons, I suspect that our current financial scenario may make many of us more cognizant and vigilant in discerning what is really important in terms of our spending, saving, and the resulting effect on our lives as a whole.
January 6, 2009 9:00 PM | Reply | Permalink
Yep...how right you are. As George Carlin has said,
"...spending money you don't have on things you don't need. "
C
January 6, 2009 9:52 PM | Reply | Permalink
If you've heard almost nothing about CDS then you should read more of the paper. There's been plenty of articles about CDS getting out of control. Read Michael Lewis' recent article in Portfolio called "The End". It's a great read.
Apologies eds for your taking my comments as "rude". Didn't mean to be. Just trying to explain what I thought was the point of the article
I don't think anyone is saying that the economy rises and falls based on spending beyond "core needs". If you buy a new shirt or if you buy a new washing machine, they both go to help GDP.
January 6, 2009 9:57 PM | Reply | Permalink
Yes. The whole idea that our GDP is largely determined by what people buy at Walmart, Sears and Macy's semms more that a little bit crazy to me.
C
January 6, 2009 10:02 PM | Reply | Permalink
C - why does it seem crazy that GDP is largely determined by consumer spending?
January 6, 2009 10:04 PM | Reply | Permalink
My proposed answer: It is absolutely crazy that consumer spending has such a large effect on the GDP. I believe we should have broadly reported *honest* economic statistics that measure wealth-making productivity in addition to the current statistics measuring total throughput.
I contend that total throughput measurement allows the movement of capital on one side, and consumer spending on the other side, to bias the statistic and in consequence fail to measure the value of wealth production through diligent and creative work.
I believe further that all such measures will always have room for subjective judgment, and that they must be subjected to re-evaluation regularly. Someone always learns to game the system, and the measurement system must evolve to account for evolution in the players.
January 6, 2009 10:32 PM | Reply | Permalink
Because there was a time, not long ago, when it was determined by manufacturing. Actually making things here, in the US, that people wanted and needed. Stuff that we exported to other places.
When American products were being copied by Europe and Japan. Especially electronics.
Yes I know this seems odd now, but it was true.
(snark thrower off)
C
January 6, 2009 10:36 PM | Reply | Permalink
Bill, I read 'The End' months ago. It's historical, and sometimes hysterical. But what's happening to CDSes NOW?
January 7, 2009 5:08 AM | Reply | Permalink
Further on CDS... it burns me to think that some TARP and other "bailout" funds may be going to pay off outright gamblers. How much government money is being funneled through "banks" or AIG to cover Steve Eisman's bets, for instance?
January 7, 2009 5:21 AM | Reply | Permalink
I grew up with the grid that Cm is writing about here. I worked thirty hours a week through high school and then into college. A buck an hour.
You can do all the reverse inflation logic on that but a buck an hour was nothing. Just like $5 is nothing now.
But college was so cheap. And I paid my way.
And I did not get my first credit card for a long time.
No bundling back then.
January 6, 2009 10:48 PM | Reply | Permalink
Well I worked as a consumer electronics service technician for a number of years and make around 7k a year. That was considered middle class then.
But I here ya. There was stuff that was dirt cheap.
Like gas, electricity, food and what not.
Techno-toys were very expensive by the standards of the day.
I guess it depends on what one personally considers a necessity and what's a luxury.
C
January 6, 2009 11:03 PM | Reply | Permalink
Yes CM and maybe there has to be a new take on how we live in America.
Now I have nothing. But for twenty dollars a month plus sixteen for cable, I get to write everyday and somebody actually reads it.
Ever try to get a letter to the editor published in 1960?
January 6, 2009 11:11 PM | Reply | Permalink
Ever try to get a letter to the editor published in 1960?
No but I get your point. That you can write everyday and people will read it, that is a good thing.
I was not intending to imply that all of todays changes are bad. Far from it. It's just that we seem to "throw the baby out with the bath water" far to often.
C
January 6, 2009 11:29 PM | Reply | Permalink
C - you say there was a time when GDP was determined by manufacturing?
Way back many years ago when I was in college the formula was Y = C + I + G + NX. I don't think that formula has changed in a long time.
And the biggest component of the formula has always been personal consumption ("C"). I've always remembered C representing at least 60% of GDP. It has grown over the last 10-20 years from 60% to 70%, but my point is that it's always been the biggest component. It may have peaked at around 70% recently but even back in the 1940's consumption accounted for 65% of GDP.
January 7, 2009 6:16 AM | Reply | Permalink
The C would seem more meaningful if what was C'd was actually made in the U.S. and paid workers wages to do it. I know G and C are supposed to cover the input into companies, and thus take care of the wages. But it feels too much like a ponzi scheme to me.
January 7, 2009 11:23 AM | Reply | Permalink
Eds - I don't think it's fair to view the TARP funds as going to pay off "gamblers" like Eisman.
Banks' money is fungible. They are lending less for the same reason consumers are saving more - the banks are overleveraged.
I'm not a fan of the overall TARP - would have been happy to see more banks that made bad business decisions go under. But neither Congress, Obama or McCain had the guts to say "no" to the TARP.
CDSes will get regulated through an exchange so there's more transparency. But they won't go away. They were abused and things will get fixed.
But CDS did not "cause the crisis" as you say. I look at CDS alot like equity derivatives. You can make a lot of money selling call options on a stock you think is going to go to down without having to own shares of the stock. If the stock falls dramatically because it was overpriced and the business is deteriorating and perhaps files for bankruptcy, who's fault is that? How do you blame the person selling call options? They aren't to blame for the company's business prospects.
January 7, 2009 6:26 AM | Reply | Permalink
I suspect companies may go under, at least in part, because investors expect quick and cheap profits. they force company directors to lay people off and move operations overseas or bring in cheap H1-B labor. That's not sustainable. Then, when the replaced labor force finally decides to stop buying whatever it is that the company makes, the whole thing collapses.
January 7, 2009 11:26 AM | Reply | Permalink
GC - can you explain again how a company "going under" is caused by people taking short positions either in the equity or debt securities of that company? How are "they" forcing the company to lay people off and move operations overseas?
January 7, 2009 3:00 PM | Reply | Permalink
Bill,
Actually they did. Complex derivatives amplified and distorted credit uncertainty. That created a crisis out of a downturn. It made it impossible to value assets correctly and thus to assign risk reasonably. You seem to be arguing something else, that CDSes did not cause the original housing bubble. That's also arguable but not topical. You can say that CDSes "were abused" but that supports my point, if CDS abuse helped create a crisis condition, CDS caused the crisis.
As for TARP, you wrote:
It's not fair for TARP funds to directly or indirectly pay off the casino bets placed on the side. As for money being fungible, sometimes it comes with strings attached as to how it shows up on balance sheets etc. and how it can be used. TARP should have placed constraints such that banks receiving TARP funds would have protection for some asset-liability situations, but would have to go bankrupt for other situations.
January 7, 2009 5:49 PM | Reply | Permalink
Eds - I don't understand how you can say that CDS that made things illiquid and impossible to value assets correctly? The banks securitized all these sub-prime mortgages and when the housing market went south, the market dried up for all tranches of CLOs and CDOs. But these securitizations became completely illiquid and impossible to value no matter if there were CDS contracts written on them or not.
CDS did not create the crisis. It's the same thing as saying that short-sellers cause companies to go bankrupt. Companies go bankrupt because they are over-leveraged or the business models are broker. Companies don't go bankrupt because someone shorted their stock.
January 7, 2009 7:54 PM | Reply | Permalink
If you have a bet, and you also place a side bet on the first bet, it gets complicated regardless of how simple the first bet is to evaluate. If someone else comes along and wants to know your financial condition, they can't just look at your first bet. If there is a web of side bets, it's impossible to simplify with certainty.
MBS instruments do complicate things, but that can be resolved linearly, you just look at all 1000 or so mortgages underlying the security.
January 7, 2009 10:12 PM | Reply | Permalink
Is your day job in the area of finance or CDS? If you could please be more specific and tell me how all the side-bets forced a company to fail.
For example, if CDS instruments didn't exist, wouldn't bear stearns still have failed? how about countrywide and all the sub-prime lenders? Are you saying that WaMu and Wachovia wouldn't have failed if the CDS market didn't exist?
January 8, 2009 6:44 AM | Reply | Permalink
Bill, You continue to prove you cannot read, or perhaps that you intentionally distort the point.
January 8, 2009 9:04 PM | Reply | Permalink
Not true. (And I'm not the one that brought up CDS in the first place on a blog whose subject is saving money)
You claimed the CDS "caused the crisis". I assume you mean the credit "crisis" that we're in right now. And my point is that CDS did not cause this crisis. Bear, Lehman, Wachovia, WAMU, FRE, FNM all would have gone bankrupt/been taken over/etc even if the CDS product did not exist.
CDS did not "cause the crisis"
January 8, 2009 10:23 PM | Reply | Permalink
Empty denial is neither argument nor discussion. I stated my points quite clearly, you're off on some other issue, and so I will leave readers who read what I actually wrote to form their own conclusions.
January 9, 2009 2:18 AM | Reply | Permalink
Empty denial? Maybe if I was just saying "you're wrong". But you're just speaking in generalities. You said "it gets complicated" and "if someone wants to look at your financial position, they can't just look at your first bet".
And I'm saying that those concepts did not cause the crisis. The credit crunch was driven by housing. Consumers got overleveraged and it was driven by mortgage originators (like Countrywide and IndyMac) who didn't care too much about lending standards because they would just sell the loans to someone who would then go off and re-package them.
January 9, 2009 7:18 AM | Reply | Permalink
The crisis was the inability to lend money on account of the uncertainty of balance sheet status due to derivatives. Interbank measures exploded bringing interbank lending to a virtual halt. This is the crisis under discussion.
"If you have a bet, and you also place a side bet on the first bet, it gets complicated regardless of how simple the first bet is to evaluate. If someone else comes along and wants to know your financial condition, they can't just look at your first bet. If there is a web of side bets, it's impossible to simplify with certainty."
The housing bubble is not the crisis.
January 9, 2009 4:46 PM | Reply | Permalink
Let's talk specifics. Let's take Bear as an example. People wouldn't lend to Bear because of CDS? Don't believe everything that you read on Portfolio.com
But I'm interested to know how CDS caused Bear to fail. Bear's subprime exposure was not created from CDS. Bear was long a significant amount of mortgage backed bonds. Much more so than any protection they might have sold.
Bear was long mortgages and made tons of $ on the way up but they got caught on the way down.
Other banks stopped lending to them because they were over-levered, not because they might have sold too much protection to other entities that were in danger of defaulting
January 9, 2009 9:08 PM | Reply | Permalink
Cmauken you communist! Didn't you get the message after 9/11 when our President, that god-fearing, right-thinking patriot and capitalist--the distinguished George W. Bush--told us that the solution to all our most difficult problems is to . . . shop!
January 7, 2009 7:12 AM | Reply | Permalink
LMBO !!! You got me. I leave with my tail between my legs. :-)
C
January 7, 2009 9:28 AM | Reply | Permalink
The long and the short of it is simply this. That nearly everyone used and abused credit as though it was a bottomless well of money and now that well has run dry.
There is enough irresponsibility to go around.
C
January 7, 2009 7:22 PM | Reply | Permalink