I’ve read that Americans spend 105% of what they earn, and that consumer debt in this country is out of control. While it’s easy to see how this will make for bleak futures for the individuals who spend recklessly and don’t save, what will be the effect on the national economy? How will the national consumer debt affect people who DO spend less than they earn and set a little aside, like the prudent Mr. Windchill? Will there be an economic collapse that makes my savings worthless? Should I be living large, while the large living is good? Or will people with even modest capital be kings among paupers, reaping high rewards on their investment capital?
Similarly, does spending less than you earn help shore up the economy? Am I making America stronger?
If it matters, I’m a mutual fund/CD kind of guy, not a stock market guy. I put safety first.
Well, the effect of excessive consumer spending is a lot like deficit spending by the government - it’s a temporary stimulus to the economy, which needs to be paid back later. Whether it’s overall good or bad for the economy depends on what the money is being spent on. If it’s spend on goods and services that will make us more productive, then maybe it’s a good thing. The analogy would be to borrow money to improve a shop or to better your education. If the money is being spent on things that are transitory luxuries, then it’s probably a bad thing.
My understanding of much of this debt is that it’s tied to the real-estate boom. People are borrowing money against their suddenly increased real estate values. That adds volatility to the economy in the sense that if there is an economic downturn, it’ll be a double whammy in that not only will there be foreclosures on real estate and therefore a collapse in the real estate construction industry, but all that consumer spending that’s propping up the economy will stop, making the recession worse.
Another bad effect is that it creates an over-reliance on government to look after people after retirement. And my opinion is that people who rely on government to look after them eventually find that governments are unreliable.
I think part of the reason that Americans take on huge debt, is the expectation that a massive bout of inflation is coming down the road. Say the government decides to print money like crazy…and we wind up with 18-20% inflation. If your debt is pegged at 8%, you are coming out ahead! On the other hand, idf you are a saver, a few years of hyperinflation can make your savings worthless. I am debating this point-I see high inflation coming…I just don’t know when.
Variable rate? Hell, how about “interest only” mortgages? As I understand them, they’re basically leasing your house from the bank while hoping you’ll be able to sell for a net gain once you consider inflation and (more importantly) a boom in the housing market.
I’m currently contemplating saving as much as I can in anticipation of a hell of a lot of foreclosures in the next few years…
I think it only makes sense of you’re planning on keeping the property for a VERY short amount of time - like if you’re planning to flip the property and you’re only keeping it for 2 or 3 months, great.
I think as soon as you’re going to be in it for a year or more, you’re really rolling the dice.
Dmitry Orlov maintains that one reason Russia survived as well as it did during the post-Soviet collapse was that housing was state-owned, and thus, even if people were out of work or there was little provisdion of supplies, at least they had a place to sleep:
Would the US fare as well during a new Depression and a wave of bankruptcies, foreclosures and evictions?
I’m not too sure about this one. My initial gut answer was the terrors of inflation (leading to hyperinflation), but the more I think about it, I’m not so sure that is the case. Consumer debt in America, IIRC, is by an overwhelming majority, tied to credit card debt. So, credit card companies (well, banks, really) are holding debt and making it increasingly more expensive for Americans to buy because of the high rates of interest. Eventually, (taking it to an extreme) the monthly minimum balance will be more than what the credit card holder can afford. At this point, it won’t take that much for that person to default. For instance, I have around $100k in various credit. If I max it out, I don’t see how I could keep up with the payments. I would default and if enough people did it, in turn the banks would default. Because no one is buying the market slows, and then capital expenditure will surely slow (b/c people will find more stable avenues for savings/investment, possibly an increase in foreign markets). Prices will drop and then the entire market will depress. Unemlpoyment rises, stagnation occurs, etc.
This depends if inflation occurs, which is a distinct possibility which Sam Stone already covered.
If my scenario occurs, then for sure, cash is king. So if your investments are liquid, you should be doing all right.
This largely depends on what the financial institution does with its deposits. If it loans out willy-nilly to risky ventures, then no, your saving is not going to do much good. If it is set to invest in the market (like a mutual fund), then that helps out the economy a lot more.