LBYM is not factored into our economy

[mickeyd]

Based on information that I have absorbed over my lifetime of trying to understand American economics, this is how I see it.

As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it. Debt is part of the fabric of our economic system ever since the Fed got involved in 1913. Savings has no (little?) place in the formula. The economy as a whole does not care about our personal interests. You spend; they profit. This is how the American economy works.

Am I wrong?

 

[MasterBlaster]

Well, that certainly was the trend before the Great Recession.

Just now some of us are realizing that we as individuals and we as a country don't have the capacity to continue previous consumption patterns.

 

[Dimsumkid]

As consumers, it is our job, no, our requirement, to spend at breakneck speed.

About 8 years ago, DW's boss told her that we weren't Americans because we didn't have any debt, didn't load up on credit card debt and didn't spend everything we made.

 

[Sam]

As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it. Debt is part of the fabric of our economic system ever since the Fed got involved in 1913. Savings has no (little?) place in the formula. The economy as a whole does not care about our personal interests. You spend; they profit. This is how the American economy works.
Am I wrong?

Totally crazy and totally true.

Here's one more observation: The government actually rewards the reckless spenders and punishes those who save.

Can someone please explain why it is so? In layman terms if possible. I'm afraid I will die before I can understand this concept.

 

[Gumby]

Paradox of thrift -- good for us individually to be thrifty; bad when we are all thrifty.

 

[lowflyer]

As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it. Debt is part of the fabric of our economic system ever since the Fed got involved in 1913. Savings has no (little?) place in the formula. The economy as a whole does not care about our personal interests. You spend; they profit. This is how the American economy works.

Am I wrong?

It would seem that you are partly right. Sad, but true. Thankfully, not everyone goes down that path and for those who have/do, the financial upheaval of the past few years looks like it will change the way some view savings and debt. The "deleveraging" of both businesses and individuals is well underway in many areas. Once things settle down a bit, people will likely go back to their old ways. Again, sad, but probably true.

 

[audreyh1]

About 8 years ago, DW's boss told her that we weren't Americans because we didn't have any debt, didn't load up on credit card debt and didn't spend everything we made.

In the first few years of my career, I remember walking between building with my boss, the owner of the company, and he pointed to someone's hot new car and pointed out how he loved to see those cars in the parking lot because he knew those people would be hard at work every day. I just remember being so glad I hadn't committed myself to that kind of debt already.

In other words - bosses always love to see employees in debt because then they really need their jobs.

Audrey

 

[Finance Dave]

About 8 years ago, DW's boss told her that we weren't Americans because we didn't have any debt, didn't load up on credit card debt and didn't spend everything we made.

How's that working out for him/her?


When friends say they use the 80% rule (live in retirement on 80% of what you make now), I tell them I use 50%. When they say that's not possible...I say "It's pretty easy when you're currently saving 50% of what you make." All I need to do is stop saving and all the other expenses stay the same.

 

[NW-Bound]

...all the other expenses stay the same.

Not if you find yourself with lots of time on hand, then the travel lust hits you... Or you take up some expensive hobbies that you did not have time for, back when you were still working...

 

[GregLee]

Here's one more observation: The government actually rewards the reckless spenders and punishes those who save.

Can someone please explain why it is so?

Hey! Finally, an easy question. The reckless spenders are in the majority, and the government is chosen by the majority.

 

[Finance Dave]

Not if you find yourself with lots of time on hand, then the travel lust hits you... Or you take up some expensive hobbies that you did not have time for, back when you were still working...

Trust me, I've done the analysis. Some costs will go down, some will go up...but overall expenses will be the same. Already have LTC, and the wildcard of health insurance is covered. Work clothes, expensive lunches, group gifts at work, gas money to work, needing two nice cars, all will go away/down.

As far as hobbies, I already spend a lot on hobbies, no way that could increase.

Travel? We travel once a year now, I've budgeted in retirement for 2x/year, and nicer/longer trips.

Entertainment will increase, but guess what....our house will be fully paid off in 3 years...one year before rehirement.

I'm not worried about the expense side.

 

[Onward]

Savings has no (little?) place in the formula.

Without saving, there is no investment. Without investment, there is no capital formation or growth. So the economy requires saving just as much as it requires spending.

The economy as a whole does not care about our personal interests.

That's true, but you don't need it to. You can do just fine with no one and no thing looking out for you.

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. - Adam Smith

 

[Sam]

Without saving, there is no investment. Without investment, there is no capital formation or growth. So the economy requires saving just as much as it requires spending.

Are you sure? Can they just print money? It has been done before, right?

 

[EO 11110]

Are you sure? Can they just print money? It has been done before, right?

You will have to excuse him. He's talking about a SOUND monetary system. He may even be an Austrian, rather than a Keynesian.

 

[traineeinvestor]

Not if you find yourself with lots of time on hand, then the travel lust hits you... Or you take up some expensive hobbies that you did not have time for, back when you were still working...

+1

I expect my personal expenses to go UP once I retire because I will have more time on my hands and I have a very long bucket list to work through. If the expenses don't go up enough, I may have to force myself to spend the money.

 

[chinaco]

Well if no one bought anything there would be no incentive to produce anything and the economy would collapse.

However... people (Americans in particular) like their stuff!

2008 was a high watermark of consumption in aggregate for the US in terms of what it could produce and afford (at this point)... at least in housing! Housing (driven by cheap and easy money and new money sources... MBS to the extreme) was an enabler of that consumption bubble. The housing bubble was only partially consumption oriented... at the margins there was speculation (people buying single-family dwellings as investments for a quick flip).

Most believe it will be years (perhaps another 5 years or so) before it equalizes.

If you consider that growth occurs at the margin (not the base)... then where will the marginal growth come from?


I believe much of it will come from the spending when boomers retire.

The cycle will look like this: Boomers retire and begin spending down their assets and eventually die (some sooner than later). The job vacancy is filled by some new college graduate. The retire boomer spending + the replacement worker spending increases spending overall. When the mid career person's boomer parent dies, they inherit, that money will be spent or free up resources for them to spend more (in total).

The boomer retirement cycle will cause booms in several areas.... health care, services, etc.

The boomer retirement cycle will be the source of marginal growth (though consumption) the economic base will be other areas of the economy (normal activity)... technology, entertainment, (some manufacturing.. probably weapons), intellectual property, etc. There could always be the next "big thing".. perhaps green energy.

The boomer retirement cycle (and consequential release of boomer assets for spending) will be the new boom (no pun intended) that will fill the vacuum filled by the bursting of the housing bubble.

When we are gone... there could be another big financial crisis if it is not engineered properly. That is a gen x and gen y problem.... a health care industry that is bigger than the number of customers.

 

[keegs]

My parents were married in 1939. We were six kids on one income. I think those two things in combination with other factors (like I actually can afford to keep out of debt and save for retirement) may have had something to do with my appreciation for thrift.

Anything done to an extreme usually means trouble. I try to keep all things in balance.

 

[ziggy29]

For years, we were warned about having a terrible savings rate and were encouraged to save. Those of us who were "frugal before it was cool" thought the same thing ourselves -- and mostly lived it.

Then came the Crash of '08. Now it seems these same folks -- economists, politicians, other talking heads -- tell us it's our patriotic duty to reflate the bubble with more profligate spending, and to stop doing "irresponsible" things like saving more or paying off debts.

 

[nun]

The consumption and debt required to support the growth required by capitalism looks great on a macro economic scale.....but it's not good for personal finances. I'm anti-capitalist in my personal finances. I LBYM, spend very frugally and my only debt is the mortgage. I broke my "NO DEBT" rule to buy my two family home, but only because it generates enough income to cover most of the mortgage.

 

[Sam]

For years, we were warned about having a terrible savings rate and were encouraged to save...

I see those "warnings" every now and then, but all of them are published in the financial section of newspapers and magazines.

I could not recall a single warning or encouragement from our USA government promoting personal saving, have you?

 

[Independent]

1) As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it.
2) Debt is part of the fabric of our economic system ever since the Fed got involved in 1913.
3) Savings has no (little?) place in the formula.
4) The economy as a whole does not care about our personal interests.
5) You spend; they profit. This is how the American economy works.

I added the numbers ...

1) IF we've been spending at a breakneck speed, a sudden change leads to lots of dislocations which have real cost. That doesn't mean our economy couldn't be sustainable with lower levels of consumer debt.
2) Debt was part of the fabric of our system long before the Fed. Debt is a good thing when it's the other side of a voluntary transaction that involves somebody deferring consumption.
3) Our economy couldn't last without savings, and I wouldn't know where to find an economist who would disagree with that.
4) Correct. Adam Smith explained how an economy can work efficiently even if it's a totally impersonal set of rules. It's not a moral system, but it's not immoral either.
5) You work, earn, then choose to spend or save. Some private businesses are planning to make a profit on your spending, some are trying to make a profit on your saving, many are interested in both your spending and saving.

I think I'm saying there is nothing inherent in free market capitalism (or fiat money, if that's your underlying concern) which forces us to over-spend and under-save. If Americans do that, IMO it shows that we aren't using this tool as well as we should.

 

[nun]

I see those "warnings" every now and then, but all of them are published in the financial section of newspapers and magazines.

I could not recall a single warning or encouragement from our USA government promoting personal saving, have you?

What about tax breaks on ROTHs IRAs 401k etc.

I'd also like to see the US do something similar to the UK with "Individual Savings Accounts". These are similar to IRAs, but they are not for retirement, just regular saving and investing. You can put in around $15k a year and all the dividends and capital gains are tax free.

 

[stoutboy]

You are both right and wrong. Our national savings rate was actually quite healthy until the early-mid 1980s. That's when "Greed is Good" became respectable and living beyond one's means became the norm. One can clearly mark our national decline from that point, and it has only accelerated since. We are embarked on a race to the bottom.

Based on information that I have absorbed over my lifetime of trying to understand American economics, this is how I see it.

As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it. Debt is part of the fabric of our economic system ever since the Fed got involved in 1913. Savings has no (little?) place in the formula. The economy as a whole does not care about our personal interests. You spend; they profit. This is how the American economy works.

Am I wrong?

 

[ziggy29]

You are both right and wrong. Our national savings rate was actually quite healthy until the early-mid 1980s. That's when "Greed is Good" became respectable and living beyond one's means became the norm. One can clearly mark our national decline from that point, and it has only accelerated since. We are embarked on a race to the bottom.

It's interesting that you trace the timeline to a significant electoral shift and a change in political leadership. I'm sure that's just a coincidence; wouldn't want to get all political here....

 

[Sam]

What about tax breaks on ROTHs IRAs 401k etc.

That's true. Thanks.