SAVE MORE, CONSUME LESS

With the stimulus checks just days away for most, retailers are announcing sales, promotions, and incentives to get you through their door with the check in your hand to spend it with them before the ink is even dry.

DON”T DO IT.

Americas has a huge money problem, and a big part of the problem is that we don’t save enough. What’s worse, we seem to not be happy just spending what we have, we have gotten hooked on spending money we don’t have as well.

There is a nifty little chart here:

http://www.frbsf.org/education/activities/drecon/2002/0202.html
According to the Federal Reserve of San Francisco the saving as a Percentage of Disposable Personal Income in the United States averaged 7.9% from 1959 to 2001. That percentage got as high as 11% in the mid 80’s, but seemed to take a very sharp nose dive from 1995 to 2001 bottoming out in 2000 at 1.0%. So to put it another way, in 1985 people were saving $11 for every $100 dollars that they took home. In 2000, it was $1 for every hundred. But wait, it gets worse.

In 2005 the rate dropped to -.2 percent.
And in 2006 It was -.6 percent.

That’s right. We spent $100.60 for every $100 dollars that we brought home.

This I believe has led us to the sorry state we are in now.

So how have we been doing it? Fantastic plastic of course, and even worse, pulling money out of our homes to by useless crap that we don’t need.

To quote the St Louis Federal reserve.
“Household‘s consumption share of disposable
income also increased, from 87.5 percent in 1980
to 95.8 percent in 2006, which implies an additional
$802.5 billion of personal income was consumed rather
than saved.
This consumption boom and the associated decline in
the saving rate coincided with a large increase in revolving
credit outstanding, which consists primarily of household
credit card debt.
It is striking to see how closely these numbers match:
the increase in the trade deficit ($762 billion), the increase
in consumption due to a rise in consumption’s share of
personal income ($802 billion), and the increase in revolving
credit outstanding (about $800 billion).”

We have had a Consumption Boom. We have been spending money we don’t have on crap we don’t need, and it has finally come to bite us on the…

So don’t spend it. Take the check to the bank, open a savings account if you don’t have one, deposit it and forget about it. This is found money and a perfect way to start saving and keep saving in preparation for the tough times that could be a head.

This stimulus is just another band aid provided by the government on a bullet hole sized problem. Recession is here and even the experts don’t know how long or how deep this one will be. Increased consumption is a way for the government to convince themselves that they have done something to help out the little guy, but increased consumption is how we got in the mess that we are in.

As a great man once said. “There are a million ways to get the bus into the ditch, but only a few to get it out.” We are in the ditch and the only way out is through reduced demand, increased savings, and reduced consumption.

~ by takinitback on May 10, 2008.