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Will Debt De-Leveraging Boost Economy?

Will Debt De-Leveraging Boost Economy?

I have been thinking about this some from a personal perspective. While I believe consumers de-leveraging their debt should free up some extra cash for consumption, I am not convinced it is going to provide a very big boost to the economy. Here are a few reasons why:

  • High unemployment makes people fearful of spending too much money. If you lose your job tomorrow, it may be months – if not longer – before you get hired again.
  • Government policies such as Obamacare, pending decisions on extending Bush tax rates, and the generally chilly attitude of the current administration towards small business has made people uncertain. When people are uncertain, they tend to do nothing rather than increasing spending.
  • Saving and autonomy: With increasingly intrusive government and worries over higher taxes and more regulation, it seems one of the only things an individual can do to maintain some small level of autonomy is save money. If a person can save several months (even better – several years) of cash in case of emergency or job loss, then that opens up the option of moving to where more jobs are, working part-time while seeking a new job, acquiring additional education, etc. The alternative to saving for many is relying on the government to provide benefits. Government money always comes with strings – nothing is free. 
  • Re-examination of values: Many people during the current economic downturn have taken the time and re-examined what is really important to them. Friends, family, religion, hobbies, causes, etc. have taken on new found importance. Keeping up with the Joneses and working as hard as you can to acquire the latest bauble often comes with a hidden price. If you're up to your eyeballs in debt, you're not really free anymore. You have to keep working just to pay your bills. In fact, you may have to work more than full-time just to meet your obligations. Where is the time to enjoy all that stuff you purchased? Don't get me wrong. I like stuff. I love gadgets. However, I want to own my stuff, not have it own me. If you're working yourself to death, have no savings, live in constant fear of losing your job, and worry you can't pay your bills, then it seems to me that you are owned by your possessions.
  • Rebellion: Granted, I don't believe this is necessarily a large percentage of the population, but I think more people are waking up to the fact that we live in a debt based economy. Our current monetary system only creates money with the creation of a corresponding debt. It is a fiat system which is not sustainable over time. It forces people to become slaves to their debt and makes banks their masters. If you're a banker, it's great, for you – not so great. What is interesting now is that government is pushing people so hard to spend money, when saving is needed. In the long run saving will allow households to de-lever and gain some degree of control over their finances. Ironically, increased savings would also benefit the banks by giving them a larger base of money to make loans to businesses or individuals. Personally, with so much pressure to spend and so many government created disincentives to save, I tend to rebel and save even more – partly just to spite the powers that be and partly to have some degree of independence.

I don't know if consumers will or won't change their attitudes regarding consumption over the long-term, but I know my attitude has definitely changed. I am not anti-consumption. However, I am much more pro-saving than I have ever been in my life. I see people in business who are careful with their money, investments in equipment, and hiring who are able to successfully maintain their business even in a down economy. I also think about every purchase now and rarely – if ever – make an impulsive spending decision. Too often in the past I would purchase something, only to regret it later. I enjoy saving and knowing that should an emergency come up, there is at least something put aside to help make it through to the other side. It may not be much, but the alternative is being buffeted by the fickle winds of government policy and an uncertain economy. Faced with that alternative, I would rather put aside something for tomorrow than spend, spend, spend today. 
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