The ‘saving more, spending less’ conundrum

A Feb. 2 Associated Press article by Martin Crutsinger discussed the economic paradox resulting from people saving more and spending less.

Mr. Crutsinger noted that as people reduced their credit card debt and put more money in the bank, they spent less and therefore stimulated the economy less.

This is true, but it is a very short-term viewpoint, especially for credit card debt. When people begin buying more by borrowing money on their credit cards, they obviously are stimulating the economy through the purchase of goods and services that they otherwise could not afford, but that quickly reverses. Within just a few months, people holding significant credit card debt are reduced to purchasing less than they would have without the credit card debt. Their income has remained constant, but a significant portion of their income is now spent on credit card interest. What they spend on interest, they cannot spend on purchases.

The banks therefore get more money, but the manufacturing and service industries get less. The current decrease in spending due to the reduction in credit card debt is temporary. The long-term effects will actually increase spending in the manufacturing and service sectors.

This is also true of money placed in savings accounts. Obviously, when many people suddenly start saving more, there is an initial negative impact on the manufacturing and service industries, but this is temporary. When people save enough to buy larger ticket items without borrowing, it again means less money for the banks and more for the manufacturing and service industries.

In short, the current trend away from personal debt is good for both the individuals and the economy in general.

James Dees
Dothan