Tuesday, November 25, 2008

More on the Big Scary Economy

Here's a question to think about. Does consumer spending most accurately reflect current economic conditions or does consumer spending actually reflect perceived economic conditions?

The dour economic news coming from the media has continued to focus on the predicted downturn in consumer spending this holiday season and it just has me wondering how this all works. After all, fuel prices are way down and consumer prices have begun to drop in response to declining consumer demand. But why exactly is consumer demand declining? Yes, unemployment is up slightly, but the across the board decline in consumer spending isn't about the few are out of work, it's about the vast numbers of people electing not to spend their disposable income.

I guess the question I'm asking is, does fear perpetuate a poor economy? And doesn't consumer spending drive a successful economy?

Thrift is touted as a virtue by some, while others decry the consumerism that seems to define American culture. But aren't our spending habits what have made us wealthy in the first place? Demand for consumer goods creates jobs and wealth. Money spent helps drives the economy- pure saving does not. It just all has me wondering if Americans fear about the economy is only going to make things worse.


Anonymous rose said...

The largest portion of someone's net worth is generally the equity in their home, which has deteriorated significantly in the past 18 months, so I think people point to that as factor #1.

But no doubt about it, what your saying is true.

Now, on to spending versus savings. Unless you're taking a really short-term perspective, I would disagree with the idea that savings don't drive our economy. Whether you're putting your money in a CD, in a mutual fund or in a company, that money is going to be lent to somebody who is going to re-invest it. Now obviously you're gonna say that, unless their is consumer spending there won't be any incentive for a business to borrow money and obviously that's correct. So I guess you've got kind of a chicken and egg type deal with savings/investment and spending.

Which leads me to my last point. You credit our spending habits with making us wealthy in the first place. But wouldn't you say its much more accurate to say that our productivity is why we're so wealthy? Spending is the result of people who are self-interested and have the means to spend. But our means come from the fact that the American worker has been the most productive in the world for a long time.

So I guess what I'm saying is, who cares if people save/invest instead of spend. It doesn't matter in the end, the money is staying in the system either way. Productivity is what matters in the long run.

2:35 PM  
Anonymous rose said...

Speaking of productivity, would it be wrong to look at the housing crisis like this:

We spent billions alotting labor and materials to building houses that would never be paid for by their occupants. Their occupants have been foreclosed on and do not live in these houses any more and the people who financed these houses have not been paid back.

And we have to measure productivity in utility (in dollars) created by investment (in dollars)right? So we invested all these labor hours and materials into homes that are providing little to no utility to anyone...so in essence, we made ourselves poorer as a nation and really that is at the root of our problem. It's not just a crisis in confidence, or banks balance sheets etc....but a complete misallocation of resources that made us poorer...

I dunno, thinking aloud.

2:41 PM  
Blogger lonely libertarian said...

Well I didn't get into it, but there is a tremendous difference between investment and saving, in putting your money in the market versus leaving it in the bank. Investment that provides capital is one thing, but it seems to me that what we're talking about now is a shift from consumer spending to savings.

I didn't mean to indicate that our spending habits were the only source of our wealth, only that they help. Productivity is only meaningful if products are actually being bought.

And it seems to me that you're dead on about the housing crisis, or at least about the cause of it.

I do think however, that the problems the economy now faces reach far beyond the housing sector. I'd say the real problem is the inability of many of the large financial institutions to act decisively and deal with these problems- And who can blame them- they're waiting and seeing what the government is going to do. As long as we play this game of bailout and wait, bailout and wait, we're going to face the possibility that these large institutions will be afraid to take decisive action or extreme measures. I really do wonder whether this so-called crisis would be over by now if the government hadn't stuck it's nose in it in the first place.

3:01 PM  
Anonymous rose said...

I'd just like to point out that $1 put in a bank can be leveraged many times over by that bank for lending or investment purposes.

The only difference in the end between buying a stock, or putting money in a CD is that the you're the risk taker in one scenario and the bank is in the other. Either way there is someone else on the other end receiving that capital.

3:59 PM  
Blogger lonely libertarian said...

Very true, but banks are limited by law as to how much cash they must keep on hand, how much they can actually invest, and where they can invest it.

I guess what I'm saying is that putting your money in savings is ultimately less efficient for the economy as a whole than actual investment or consumer spending. Unless I'm wrong.

4:19 PM  
Anonymous rose said...

I can tell you that from doing stock research mostly on small-cap companies, those that draw a lot of credit from banks deeply at risk. Doesn't matter how sound the business plan is, if you counted on having a $30m line of credit and it gets pulled from you, no amount of consumer spending is gonna save you. And at the end of the day, that line of credit is dependant on, like you said, how much cash those banks have on hand. If they need cash, easy option is pulling that line of credit.

Can't conclude that you're wrong from that simple piece of info, but that's just the perspective I have on it.

4:43 PM  

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