Saved by Spending

Macroeconomics make me tired. I barely have the energy and interest to understand my own family's finances. And today's culture of fear and the accompanying spin makes it all the harder to weigh the arguments and decide for myself how my lil' ol' part of the economy should work for mutual benefit. Perhaps I'm still bitter about Bush and his "don't-let-the-terrorists-win! Go to the Mall!" peptalk, but I have to deal with that sometime.

I've been meaning to address this for a while... it's daunting to try to sort through the theories and models. This past Sunday's NYTimes Op-Ed had input from a bunch of economists. The main question: how long is this recession going to last? The answers varied considerably but each seemed plausible and well-reasoned: when you stop asking, when you start spending, the worst is over, the worst is years off, and my favorite: it depends. So all of this gets boiled down, AP style, and today's front pages of both the StarTribune and Pioneer Press featured articles screaming in large print that people who are saving are making things worse by taking that much more cash out of circulation, bringing down demand for goods and services, which translates into more job losses. Which then makes people save more / spend less because they are out of a job, which cycles on downward, ad nauseum.

So let me reason this out. The current economic maelstrom is because of a tightening in the credit market, in no small part because of too much defaulting on mortgage debt. And the housing and investment markets had inflated value and now that they are adjusted (Objects in mirror may be larger than they appear) we have less value to balance more debt. We got used to looking at our homes as "investments" rather than places to live. And we filled these larger -than-necessary homes with expensive everything, all purchased on credit, because so many of us accepted the myth that there was always more credit available and investment growth to look forward to, sizeable mortgage interest to deduct, another credit card to transfer to... Which now is impossible to prop up any more, and cutting costs and jobs is a daily atonement meant to appease the angry gods o' finance.

With me so far? I'm not really a "hard sciences" kinda gal. I prefer things intuitive, emotive, and squishy. For real info, you probably could read the entire Wall Street Journal each day. I'll wait here. No really, you go ahead.

Okay?

We got into this mess by spending too much and not saving enough. So people respond by saving more and spending less. And this makes it all worse. Huh?

Doesn't this feel a bit like blaming the victim? Yes, too much credit was overextended to businesses and individuals so there was no cushion. And now we're in free fall. As in splat.

When this sort of devaluation happened in the Greenspan days of dot.coms, it was considered a "natural correction" to "irrational exhuberance". (It turns out it was a harbinger of things to come. Hindsight doesn't help the portfolio, however. ) When the same logic is applied to the average family's need to "rightsize" their spending to their income, it becomes part of the solution and problem - simultaneously.

Who should be spending? Who should be saving? The people who can afford to, on both counts. And also, apparently, the people who can't afford to do either. What is tricky is determining which camp you're in, what you should be spending/saving, and if you can sustain that, and for how long... There is no right answer! This is an enormously complex economic problem with a lot of accompanying fears that span everything from dread of Tuesdays, people in suits, meetings, the mailman, 401k statements, the evening news. The result is that if you still have a job, you don't have the security. And if you don't have a job, you have lots of company.

Crystal clear? Me neither. I just know that even in so-called normal times, "shoulds" piss me off with all the implied judgement. And competing mandates are crazymaking. At the end of the day, you need to do the best you can with the hand you've been dealt - and be okay with it. Rinse, repeat.

That, at least, is worth banking on.