Thursday, February 12, 2009

Spend, don't save!

You know what's ironic? All those people who lived outside of their means for the better part of the last couple decades (you know, buying homes and other luxuries they couldn't afford but were so easily attainable with "magic" cards and loans) are only now learning the virtue of hunkering down and saving . . . but only because they've been backed into a corner. Had they lived day-to-day somewhat modestly (no need to live off ramen, here), then the recent dizzying debt spiral wouldn't have unwound so rapidly in all of a few mere months. But that's not what's ironic.

What's ironic is that to fix this problem, those people are going to have to stick to what they're best at: spending. Or so says The New York Times:
Enough already with the saving that many of you have suddenly begun doing. This very moment, Congress and President Obama are preparing to send you a tax rebate, to inspire you to stimulate the economy. So go out and stimulate. Spend as if the future of your country depended on it.
Come again? The idea is that now of all times is not the time to save. It may be okay for you as an individual, but it is ruinous for our collective economy. If there ever was a time to spend, then that time is now.

Essentially, this phenomenon is called the "paradox of thrift," created by 20th-century economist John Maynard Keynes, and suggests that when a person does what they believe is "rational" (i.e., saving money) during hard times, it could be ruinous for an entire economy. Eventually, many of the savers may end up out of work because everyone else is saving, too.

Although spending is highly condoned, there's a fine line between blowing your entire paycheck at DSW and spending some of it on fancy footwear. The key is to know how to spend money now to save money later — a phenomenon that could lift the economy today and help individuals cope with their battered finances in the long run, says the NYT, who (like moi) thinks people do not do a good job of planning for the future.
[People] eat just one more doughnut and put off exercising until tomorrow and tomorrow and tomorrow. They fail to set aside enough for retirement. Again and again, they choose a bird in the hand — be it dessert, convenience or a little extra cash — over three or four in the bush. Most people could save themselves a good bit of money by giving proper respect to their future self. They could spend a little now and save a lot later.
[New York Times]

3 comments:

Fabulously Broke said...

That is so true. Controlled spending and saving is the way to live.

But everyone has been so out of balance, they've fallen off one edge or the other trying to compensate when the economy came along and tipped their balancing board.

Dedicated said...

Wonderful post! Thanks!

curiouscat said...

The idea that people need to live irresponsibly because the GDP might go down if they don't is ludicrous. That the "solution" proposed for living beyond our means and having to deal with the consequences of that is to live beyond our means more is the reason we are where we are today. And may well place our children in a very bad state a few decades from now if people don't see the foolishness of such thinking.

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