Is Borrowing The American Way?

OR…Is Saving Money Bad for the Economy?

I came across this article a few weeks ago, Industrial output falls as consumers cut back spending, and have been trying to decide what it is about it that I find so disturbing. I’m not targeting it as some sort of special case; in fact it’s one of hundreds of articles I’ve read saying pretty much the same thing. News program talking heads trumpet it all the time. Loosely, what’s good for your bank account is bad for the country. Borrowing money, it seems, truly is the American Way.

Do we actually believe that line of thinking, or do we just politely tolerate it? Surely we have to know better!

Now, I try not to do macro economics on this site, but it seems to me that this idea that the citizenry saving money is bad for the economy is some sort of article of faith that no one questions, at least in higher circles. And I don’t buy any of it!

From where I sit, it seems that the absence of savings is at the heart of our economic troubles. When a person has no savings, he lives paycheck-to-paycheck and is forced to borrow or turn to the government when he needs money in excess of his regular cash flow. In most households, this will happen most of the time—life’s just that way I suppose. But that conundrum is what gets the debt treadmill going, and once you’re on it, default is just a matter of time.

Multiply that by millions of households and you get…about where we are right now.

When were savings banished from “The American Way”?

Is Borrowing the American Way?
Is Borrowing the American Way?
I get what economists, politicians and business leaders say about the connection between spending and economic growth, but that mantra has been emphasized too many times in too many places and without serious reservation. The public has bought into it, and why not? After all, consumption feels good–and savings? Well…that’s kind of boring. It doesn’t fit with the media messages we’re getting, and besides, the experts and leaders say it’s bad for the economy. It’s our patriotic duty to spend!

If you’re addicted to spending, but you don’t have sufficient income to support your consumption, what do you do? You borrow.

I’ve even heard borrowing as a twisted version of “The American Way”. Some take comfort in reciting it just before signing on to a new loan or taking yet another swipe of a well worn credit card..I’ll just borrow to pay for it; after all, it’s “The American Way”. Really? Maybe that’s our credit version of “everybody’s doing it”.

By all accounts, borrowing IS a major part of life in America. We even have laws guaranteeing everyone equal access to credit. By contrast, no similar laws exist guaranteeing us equal access to food, electric power, heat, water or the internet. And millions continue to do without affordable healthcare – even doing so under penalty of law. What does that say about our priorities?

Despite the fact that millions have grown up in a world that only knows easy credit as a means of consumption, it wasn’t always true. Not even for most of our history.

There was a time when you only bought with “cash on the barrell”; or put another way, if you had to borrow to buy, you couldn’t afford it. Then there was “a penny saved is a penny earned”—early patriot Ben Franklin, I believe—but it sounds so quaint now, doesn’t it? And not so long ago when I was a kid, you’d almost rather fall on your sword than file for bankruptcy or enter foreclosure. When did all of that go away? Are we better off that it did?

How is a bigger bank account a bad thing?

Here’s where I have an issue with the experts: while it may be true that millions of people suddenly saving money will slow the economy, I think it’s just the kind of remedy needed to give us long term prosperity. Economists talk about credit as the magic bullet that juices the economy; you never hear them talking about savings rates. Perhaps they think they’re irrelevant.

For an individual, a fat bank balance is the very definition of prosperity. Rampant consumption is it’s hollowed-out, idiot cousin—a mere facsimile of the real thing. While too much money going into savings may be bad for the economy in the short run, it’s virtually the best thing any of us can do for ourselves and for the long term health of the economy.

Borrowing can juice the economy short term, but once people reach the limits of their ability to pay their debts, a crash follows—sound familiar? If the economy were filled with people living within their paychecks, stashing some for the future, and buying only gradually—but continuously—we’d have steady growth without all the painful recessions we’ve been having.

Slow, steady, predictable growth may not provide the buzz many have been getting from the short term credit induced bubble-booms, but they would allow us to make long term plans, and that can only help us, the economy and the country.

It was the kind of household budgeting that was going on back in the “good old days” of the 1950s and 1960s. Is it merely a coincidence that the US savings rate was collapsing in the early 2000s, just before the start of the financial meltdown? I doubt it.

On an individual level, having a large bank balance gives us options; we can…

  • save up for major purchases, rather than borrowing
  • use it as insulation from a job loss or some other crisis
  • use to pay off debt (side benefit: being debt-free gives us more control over our paychecks, allowing us to save even more)
  • choose to invest some of it, earning still more money
  • use it to start a business (or to keep us going while we build up a cash flow)
  • just sit on it and feel better about life.

If you have no savings, you may be doing your patriotic duty by helping the economy with borrow and spend, but you can’t do any of the above!

With a cash cushion to back you up, life becomes more predictable. You aren’t being battered by every missed paycheck or every unexpected expense that rears it’s ugly head. You can make long-term plans, long-term investments and build long-term prosperity for yourself, your family, your community and the country.

Is there anything unpatriotic about that?

( Photo from Flickr by AMagill )


11 Responses to Is Borrowing The American Way?

  1. Well put Kevin. Only consumers with a nice pile of savings can afford to keep spending. Sustainability seems like it’s missing in action in so many parts of our society. Spending all of our resources (financial or otherwise) can only continue for so long. At some point, the golden goose is gone.

    Great article!

  2. It seems that from a political standpoint, incentivizing savings/disincentivizing spending is intolerable, but it would be in everyone’s long term best interest. It takes a longterm view to pull that off, something I’m no longer sure most people have anymore. Delayed gratification seems to have gone the way of crank roll-up car windows.

  3. Kevin,

    Great observation! I think you’re right. We live in a debt-based economy. Long time ago, our economy/money supply was limited by the amount of gold a miner could dig out of the ground. Now we depend on consumers taking out credit cards, college loans, auto loans, and mortgages to grow the money supply/economy.

    Many institutions within our economy understand that and help to motivate more people to give up their savings and take out loans. Look at the recent moves by the Federal Reserve to buy back government bonds to keep interest rates low. The reason they are keeping interest rates low is to “make it easier for …consumers to borrow”. http://awurl.com/Lh4yxqHAI This is also verified by other recent policies, i.e. first time home buyers tax break and cash for clunkers which are programs they are hoping will spur more debt, not savings.

    So, I think you are right on the money (no pun intended) with your observations. We live in a debt-based economy. Until we brainstorm another way to grow the economy (if that is the goal?), we will continue to see policies and practices within many institutions to encourage citizens to consume, not save, and take on debt.

    Keep up the good work,
    Eric

  4. Well, there’s a fine balance of course. If everyone actually decided to save, and kill all discretionary spending, there are many businesses that would fail, and those people would be out of work.
    So, in a sense, those of us who advise to cut back are really talking out of both sides of our mouths a bit. I hope my readers will watch how they spend, do it wisely, but not stop altogether.

    In the big picture, ideally those who have money will go on a buying binge. The high earners who are set for life should go throw a few good parties and keep dozens busy catering, decorating, etc. The economy is a complex, fragile, beast. Gets you thinking though.

  5. JT – Of course we’re talking all things in relative terms here. There’s no way everyone quite literally stops spending, nor can anyone actually do that. But long term we might be better off if the majority were to take a spending break, build up savings, pay off debt, then get back into spending gradually. Having tens of millions of financially impaired households doens’t seem to be providing the promised stimulus. Even if we get a recovery going, it looks like it might not last. How do we plan a future around that?

  6. I totally agree with you Kevin. If people would focus on their savings account as much as they focus on the credit card in their wallets we would be able to take on more opportunities.

    I feel saving money is one of my strong points when it comes to my finances. In fact it’s that savings that is allowing me to build a brand new house right now.

    Four years ago I would have never thought it would be possible but ever since I put saving money as a priority in my finances a lot of great things have happened as a result.

  7. Hi Chris, I completely agree. If you make saving money the center of your fianances, credit and so many other financial problems just go away. You’re always ahead of the game, and that also takes out stress.

  8. Excellent points. It’s important that everyone realize how sick and distorted the govt’s economic point of view is. In a small govt environment with healthy communities, families and individuals work hard to save their dollars. They would then deposit their surplus dollars into a local bank. That’s where banks are supposed to get their loan capital from, not from the Fed or the Treasury department. Since healthy families keep their money in a bank, it’s to the bank’s benefit to manage those funds with absolute integrity. That money can then be loaned out locally to start local businesses, create jobs, help people purchase homes and cars, as well as develop local projects that benefit the population. Because families save, they would have disposable income to spend on the local businesses. Everyone would benefit. Today, bank funds come from the government, not from depositors. Loan funds come from credit and finance companies far away. Investment dollars then leave the community and go into multi-national corporations on the stock market. Everyone then wonders why local economies fail to prosper and fall into poverty. The govt serves only itself, and freely lies to the people. Politicians have stolen and destroyed that which we built. The only sure way out of the current recession is, quite literally, for families to save as much as possible. sb

  9. Hi Steve, I’d wager that not one person in ten knows that what you wrote is true. Very little loan money comes from depositor funds, most comes from the Fed. I suspect this has something to do with the fact that we have booming metropolitan areas and declining inner cities and increasingly impoverished rural areas. Money is no longer local, and it’s fast leaving those areas with no replacement capital left behind. The whole banking emphasis now is on macro expansion, and local communities are often sacrificed in the process. The trend intensifies when big banks buy up little banks, which happens evey day.

    This highlights why its so important that we get our own personal finances on solid ground. No help will come from the big boys.

  10. Funny you write about this topic because just the other day my hubby and I were discussing that before the big meltdown in 08,we kept hearing about how Americans weren’t saving enough and were headed toward financial disaster. We all know what happened. Now they are saying Americans aren’t spending enough because they got scared into saving. I personally think that people would spend more if they could, but they have maxed out all their borrowing ability, whether through credit cards, personal loans or home equity lines of credit….they have used it all and simply can’t borrow any more. Personally, we have zero debt. We do use credit cards, but the balance is paid every month. No mortgage and we are building a custom home for which we will pay cash. We were so fortunate that we were prepared in 08 and as Dave Ramsey says, we opted not to participate in the recession.

  11. Hi Kathy – We seem to be facing the same set of circumstances as 08 with high debt and low savings. It was only 7 years ago, but collectively we never learn. I think it’s too easy to toss caution to the wind and just spend based on public assurances that all is well, and will be forever. But in my opinion, public officials prodding people to spend more money (which means run up more debt) is self-serving and setting us up for another fall. Where are the public officials telling people to get out of debt and save money for the future? We live in this bizzarro world now, where the truth is seldom uttered, and lies get pushed as if they are the truth. Good for you and your husband for resisting the cultural norms of high debt and and empty bank account. You’ll likely ride out the next recession in comfort as well.

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