Is it a catch 22, do We spend or do We save? (credit rating, interest)

[tallrick]

The problem with savings is that inflation eats them up. It is good to spend your money before it becomes worthless. The idea mentioned aboue to invest in supplies, tools or income producing equipment seems good to me. I am hoping to be living in a productive rural area before the whole house of cards collapses.

[Nepenthe]

Originally Posted by HappyTexan

The government had not revealed the total debt of the "toxic" debt being sold off by the banking system. We don't know if they're 25%, 75% or 95% deleveraged. We don't know if it's just beginning or ending.

And hedge funds too: Bloomberg.com: Worldwide

[Waterlily]

Originally Posted by Huckleberry3911948

now is a great time to be without debt.

I agree. Really we've made more money in the past, but now we have no bills. It gives you a feeling of wealth since money isn't always going out the door.
I'd suggest paying off any bills that you can.

[bale002]

Originally Posted by tallrick

The problem with savings is that inflation eats them up. It is good to spend your money before it becomes worthless. The idea mentioned above to invest in supplies, tools or income-producing equipment seems good to me.

production - consumption = saving + investment

We can do one of two things with the excess of production over consumption (saving):

1 - spend it:

a) on consumption;
b) on investment;

or, more likely,

c) a reasonably balanced combination of the two.

2 - leave it idle. If you leave grain too long in storage, eventually moisture will get in, and it will rot and pests will eat it, like inflation and politicians.

Unfortunately for too long now in the domestic US economy there is no excess of production over consumption, so no question of saving.

Saving begins at home. Until a manufacturing base can be restored, saving begins with cuts in consumption and clamoring for opportunities for productive investment, local and global, (and not whining for free McMansions, gas-guzzling cars, early retirements, and free perpetual medical care). Then, and only then, will the politicians follow.

I'll be your mirror (reflect who you are).

[texdav]

Well if the american people had saved we wouldn't be borrowing all thsi money from foreign savers.People and governamnts need to live within their budget. When the governamnt spends that means that you will have higher taxes unless they tke out loans which means future interest payments. Its never good to spend what you in fact don't have and people have done this for a long time in many cases.Peopole who save are always better off than those that soend too much.

[HappyTexan]

Besides saving, we need to become producers of things..not just consumers.
70% consumer is too much..50/50 might work but that means bringing some manufacturing or IT work even back home so we actually produce some goods.

Handing us money and telling us to buy ..that's just stupid crazy.

[chuck22b]

Originally Posted by HappyTexan

Besides saving, we need to become producers of things..not just consumers.
70% consumer is too much..50/50 might work but that means bringing some manufacturing or IT work even back home so we actually produce some goods.

Handing us money and telling us to buy ..that's just stupid crazy.

Hi Happy Texan,
I did a little research after hearing that "consumption" is our problem and that we should be at 50/50 consumption to production.

Since 1929 (as much data I could get from BEA of US GDP)... the US makeup of GDP is as follows:
U.S. Department of Commerce. Bureau of Economic Analysis

GDP = Consumption + Investment + Government + Net Exports

Current (3rd Quarter - in millions):
Total GDP: 14,420
Consumption: 10,169 (70.5%)
Investments: 2,013 (14%)
Government: 2,944 (20.4%)
Net Exports: -707 (-4.9%)

Historically:
Consumption -
Minimum 49.45% of GDP in 1944
Maximum 82.96% of GDP in 1932
Median 64.77% of GDP
Mean 65.71% of GDP

Investments -
Minimum 2.21% of GDP in 1932
Maximum 19.23% of GDP in 1979
Median 15.46% of GDP
Mean 14.38% of GDP

Government -
Minimum 9.07% of GDP in 1929
Maximum 47.91% of GDP in 1944
Median 20.30% of GDP
Mean 20.51% of GDP

Net Exports -
Minimum -5.75% of GDP in 2006
Maximum 4.42% of GDP in 1947
Median -.09%
Mean -.6%

In conclusion... our current consumption levels are slightly higher than our historical median/mean 70% vs. 64%/65%... Government and Private investments are pretty much in line with historical levels... And Net Exports are quite a bit lower than the median/mean -4.9% vs. -.6%.

So, to get us back to a more balanced "US" economy... we can reduce consumption a bit and increase our net exports a bit. The USA was never really an export powerhouse (the highest being 4.42% when the rest of the world needed our products).... and we've always been predominately consumers. We can achieve the 65% consumption and close to 0% net exports simultaneously. By reducing consumption we automatically reduce our reliance on imports. Furthermore, energy is a large component of our imports and can also be further reduced. Just these two changes can shift our economic makeup back to historical norms.

The interesting thing about our GDP growth is that it has accelerated exponentially since the 1970s fueling our ability to produce, consume, and fuel private and government expenditures. The primary driver, I believe, for better or worse for all of the last 30+ years of development is the introduction of credit systems and the maturity/"sophistication" of our financial systems. Without these things, a lot of the innovation of the last 30+ years could not have happened. Consumer Credit and the use of the "Revolving Line"/"Credit Line" has been pivotal for US economic growth - introduced and more frequently used since the early 60s onward.

Federal Reserve Statistical Release G.19 Historical Data



www.economics-charts.com/images/gdp-1929-2004.png

So in short.. US Consumption has been the driver of economic growth throughout US history. Even during the 30s consumption made up actually over 74% of GDP. The only point where it dipped bellow 50% was during World War II. Credit expansion and the use of credit was the only way the US economy could sustain constant consumption driven economic expansion.

Bale002,
I'd like to update your equation a little to more how it currently works:

production - consumption = saving + investment

to

production - consumption = saving + investment + credit (future obligations)

Credit isn't necessarily bad.. as it depends on your credit rating and purpose. The most important thing is incomes and ability to pay... which ultimately relies on the increase in aggregate value of US human capital (education). Basically the US in the last decade overly leveraged itself to enjoy a higher level of consumption instead of improving human capital to increase incomes.

We just have to get back to a more rational level of leverage and increase human capital value and incomes.... a return to steady state growth rate (exongenous growth model) or a sustainable growth rate (investment term).

-chuck22b

[HappyTexan]

Nice analysis chuck22b..really puts it all in perspective.

[chet everett]

Thank you chuck22b!

Maybe if more people read through this sort of data and worried less about "gold bugs" and "bubbles" we can quickly to back to a sane level of consumption and savings!

[TexianPatriot]

Spend. The government bail out of credit card debt is next.