LBYM effect on economy

[imoldernu]

AP article on the shift to cash for gun shy investors.

My Way News - AP IMPACT: Families hoard cash 5 yrs after crisis

Quote:

An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation. "It doesn't take very much to destroy confidence, but it takes an awful lot to build it back," says Ian Bright, senior economist at ING, a global bank based in Amsterdam. "The attitude toward risk is permanently reset." A flight to safety on such a global scale is unprecedented since the end of World War II. The implications are huge: Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy.

... more

[Walt34]

The irony of that did not escape me. Lessee, didn't all those troubles stem from too many people living beyond their means on credit? And then when they live within or below their means that creates a problem?

Yes, there will be a period of less spending as loans are paid off but wouldn't the end result of little to no debt be a good thing?

[Gumby]

It is the economists' Paradox of Thrift - good for us individually; bad for us as a society.

Paradox of thrift

[Walt34]

Ah. I kind of suspected that but didn't know how to articulate it. So DW and I will continue LBYM and the SIL I refer to here as "Spendarina" can continue being good for the economy. She'll be making payments for the rest of her life.

[H2ODude]

I've always thought if the rest of America lived like I do the economy would collapse. Spend more than we used to but still way below what we could. Take particular interest in how they try to sell us cars and tech "improvements" on TV ads....no thanks.

[jollystomper]

I believe it is a short term vs. long term tradeoff. Saving certainly "hurts" in the short term, but only because of the spending expectations - which were driven by a lot of credit buying. However, I think there is a long term benefit since it has the potential to reduce dependency on government assistance programs (and in theory mean less required government spending) thus reducing government debt. And if you are able to pass on those savings to future generations it helps them as well.

But, folks just don't have patience for slow but steady growth these days...

[veremchuka]

I don't care how others live and if being frugal is a bad thing then so be it. Let them spend and go into debt, I always have and always will LBMM.

[scrinch]

Let's say tomorrow everyone starts spending 75% of what they do today, saving the rest. Then we have an economy 75% the size it is today, supporting 75% the jobs and 75% the tax revenue. There's lots of capital to lend, but with a shrunk economy no one wants to borrow it. So savers' returns are very low. In the short term it's painful for almost everyone. In the long term I guess it becomes the new normal and we all get used to it.

Maybe with less consumption we are better able to deal with global warming, deforestation, and our other environmental problems. Or maybe with a smaller economy we can't afford to. I doubt it would make us any better able to deal with our health care issues in either the short or long term.

[Midpack]

Quote:

Originally Posted by Gumby It is the economists' Paradox of Thrift - good for us individually; bad for us as a society. Paradox of thrift

Good addition to the thread. In another thread some time ago, if you accept the 'paradox of thrift,' what is the right balance between savings and consumption? Clearly no consumption could ruin an economy, as could no "savings" (net debt/excessive leverage specifically). None of us knew where that balance might be...

[MichaelB]

From the artcle

Quote:

"It doesn't take very much to destroy confidence, but it takes an awful lot to build it back," says Ian Bright, senior economist at ING, a global bank based in Amsterdam. "The attitude toward risk is permanently reset."

Funny this quote should come from Amsterdam, home of one of the greatest financial bubbles and subsequent crashes of all times. After saying 'permanently reset" they should have added "'til the next opportunity".

Greed does not take a backseat to anything, it just steps out for a breather.

[haha]

I am so worried about the effect my frugality may have on the economy that I say in my prayers every night, please god don't let my cheapness hurt our great nation.

Ha

[gcgang]

It's scary to realize our economy is based on buying stuff you don't need with money you don't have, and it can all collapse like a house of cards if people lose confidence.