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Investing and Economics Blog

The USA Economy Needs to Reduce Personal and Government Debt

The economy has structural problems. The solution at this time is not to convince people that everything is fine and just go spend money you don’t have. Personal debt is much to high. The practices that allowed huge anti-competitive and economy endangering institutions to threaten the economy have not been addressed. Hundreds of billions of dollars have been given to those who caused the credit crisis. Making the federal debt problem even worse.

Some suggest we need to regain consumer confidence. Unfortunately that fixes nothing. That “strategy” is just to convince people problems don’t exist and buying what you can’t afford is fine. Just convince people to go spend more money, run up their credit card debt, borrow against their house, as long as everyone believes it can continue. That can work for awhile but it then fails due to structural issues. And the solution becomes more and more difficult the longer such a strategy is used. The same way a ponzi scheme eventually implodes.

If you could convince those in a ponzi scheme (and new investors) that they should just be optimistic it can continue. But eventually people ask for their money to buy something and none exists and the scheme fails.

With an economy, after structural problems are addressed then you need to convince people to be less fearful and to be more optimistic. Because often by that time people have become so fearful that they are not taking even reasonable steps. They don’t buy even though they have the money in the bank and have a real need for the purchase. When this happens, convincing people that the economy is stable is important. However, cheerleading and convincing people to just continue to run up their debts to spend more is not wise when the economy is already far to in debt is not wise (though it is politically expedient).

The USA needs to stop living beyond its means. That is the most important factor to long term economic strength. But the focus doesn’t seem to be on doing this, instead it seems to be on printing money to paper over the problems. There are many great strengths of the economy and those have allowed huge federal deficits, huge personal debt, monopolistic practices, destabilizing financial risks taking… Even with that things have been quite good. But those areas need to be addressed over the long term.

Related: Let the Good Times Roll (using Credit) – Families Shouldn’t Finance Everyday Purchases on Credit – Living on Less

March 9th, 2009 John Hunter | 6 Comments | Tags: Economics, Financial Literacy, quote

Comments

6 Comments so far

  1. Barbara Swafford on March 10, 2009 2:26 am

    I’m reading this thinking of how when the economy started to slow down, I practically stopped buying anything other than necessities. After having that habit for so long now, even when things do turn back around, I doubt my mindset will. Although I now consumer spending drives the economy, I’ve learned to do more with less and am enjoying “the simple life”. In a way, it’s a good thing. 🙂

  2. Money Hacks Carnival—Spring Edition | Money TLD on March 25, 2009 5:50 am

    Spring is a time of rebirth and rejuvenation, and for us money hackers, it’s a great time to reinvigorate our finances!…

  3. Saving Spurts as Spending Slashed at Curious Cat Investing and Economics Blog on June 8, 2009 9:34 pm

    “By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard…”

  4. Why the Dollar is Falling at Curious Cat Investing and Economics Blog on October 21, 2009 10:26 pm

    The USA has, to a great extent, sold off that wealth to finance living beyond the productive capacity of the country the last 20-30 years. But that can only go on so long…

  5. Consumer Debt Down Over $100 Billion So Far in 2009 at Curious Cat Economics Blog on November 7, 2009 8:13 am

    One of the few good recent results of the economy has been a continuous decline in consumer debt. Consumer debt fell for the 8th consecutive month, for the first time, in September, declining by $15 billion…

  6. Will The Savings Rate Fall Back Again at Curious Cat Investing and Economics Blog on April 8, 2010 12:24 pm

    […] long term consequences of that it means you have to live within your means. It isn’t tricky. We need to save more. If that means the economy is slower compared to when we lived beyond our means that is what it […]

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