Saving and Debt Repayment is Good in the Long-Run

Chris Isidore’s article says we are killing the economy by saving more and paying off debt. He is correct by saying demand for products is going down since we are spending less. In the short-run, this will hurt our economy as companies adjust production downward (layoffs).

The good news is this may be temporary (at least some of it). An example would be a person with $1,000 of credit card debt. Lets say that person decides to pay off their debt over 5 months, that’s $200 per month. So now, instead of spending the money, it goes to debt. That means for 5 months, demand for various products will decrease by $1,0000. After that time period (I am leaving savings out for now) this person could go back to spending $200 per month.

The end result is a temporary reduction of demand. The spending levels returned to normal after the debt was repaid. At a macro level, companies would adjust by laying off people when the demand drops. They would rehire when the demand returns.

Another variable to this are the kinds of products we purchase as a nation. Savings is also an issue. Both savings and products we purchase are long-term spending changes. We may decide to start saving more money each month or that we don’t need as many luxury goods. Hopefully, we will repay our debt and start spending on goods soon.


12 Responses to “Saving and Debt Repayment is Good in the Long-Run”

  1. 1 Cristhian Ayvar February 12, 2009 at 9:27 AM

    “Some say the sudden rise in the savings rate since last summer is due primarily to Americans worried about their jobs and the economy.”

    Of course that is the reason many Americans are saving! With the numbers of unemployment going up, more and more people are daving there money for emergency’s now! I agree with Balassi’s response to the article, perhaps all the economy needs is to wait for American’s to pay off debts or save up enough to start spending their money more wisely in the years to come. This might be a blessing in disquies. Or as the article states, if the saving rate increases to more than 10 percent we might be introuble. But I doubt anything too drastic would transpire. American’s have herd this argument all over the news “the economy would be saved if you spend more”, “the worst thing Americans can do now is not spend money” after so many warnings it is just a matter of time before there are more consumers spending their money to save the economy!

  2. 2 Alex Schmarzo February 12, 2009 at 10:20 AM

    You can’t blame people for saving their money – it’s the necessary action to be taken in regards to the credit freeze, and (in my own opinion) is the first step towards increased spending.

    The credit freeze in essence stopped people in their tracks from spending money. The credit process allowed them the opportunity to spend money that they didn’t have, but WOULD have. By saving the money (at least in the short term) the average citizen is becoming his own credit union; he’s accumulating the money that he would have originally used from the banks (loaned on credit), and in due time will spend the money once he has reached a level of comfort that allows him to make these purchases without the help of the banking system.

    The savings are not being done in a panic (although I’m sure the mistrust of the large banking corporations has some part to play in the matter) but rather in a calculated manner that allows the average citizen to garner the funds he needs to make up for the lack of support from the banking and credit unions.

  3. 3 mrrodenas February 14, 2009 at 9:08 PM

    I understand that from an economic perspective we must have enough spending to keep goods and services flowing in a free market economy. However, our American society is well-known worlwide for its consumerism, which I thought directly related to our also well-known purchasing power. So, was it all a mirage? Such purchasing power was not based on job abundance, high earning potential, and fat paychecks, but on credit?

    I must say I am glad people are behaving sensibly in times of crisis, that is, spending less on wants and building up their savings. It is just plain wise. If Chinese citizens who earn smaller salaries can do it, why would not we be able to do it as well? The real problem is the lack of access to credit and how our savings are not going into the economy – ans who is to blame for that?? Sorry, I do not think the consumer or regular household can be to blame for that.

  4. 4 Tanisha Econ101/Tuesdays February 16, 2009 at 7:29 PM

    I think people are just doing what they have to do. What does the government expect us do do, with prices so high. I understand that there needs to be a flow of money circulating in the economy in order for it to work. But at the same time, people are saving so that one day they are able to spend again. I don’t believe most people are thinking about the side effects of lay-offs. Though many jobs may not be secure at this present time, there is at least some since of security in the homes of some, which would allow them to save.

  5. 5 NVC Storm February 17, 2009 at 7:50 PM

    That has been my number one priority for the past months because I am a college student athlete living on my own. I am very fortunate that my parents are able to give me money to survive on my own but I’m still saving every last cent because everything has been so expensive. It sounds like a good idea but really everyone that is doing this makes the economy that much worse because their is no money flow going on. But I think it is only going to get better, I believe we will fix this and start spending our money like crazy again.

  6. 6 janeth f. February 17, 2009 at 9:24 PM

    How can we start spending when a lot of us are getting laid off? The author seems a little naive because i do not see how people are all of a sudden going to be spending when they probably don’t even have a job. Some may say that when people spend it creates demand and then other people will start spending too. but there are people that are spending right now and i still see employees getting laid off.

  7. 7 Bill Cash February 18, 2009 at 12:56 PM

    I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

  8. 8 samandrews February 24, 2009 at 5:09 PM

    I understand that it may be hurting our economy if we save more and try and pay our way out of debt, but what are we expected to do? Stay in debt and spend more money? They encourage us to spend for our country while we ruin our own financial situations and sabotage ourselves?
    I remember last year when the big idea was conservation. “Every little bit counts,” they said “go green.” Now we’ve forgotten about going green and the new concern is consumption. “Don’t live minimally, live to your full potential, even if it’s beyond your means!” That’s the new message right? So we can keep our economy afloat?

  9. 9 NicoleMB March 2, 2009 at 12:29 PM

    One think I thought about is that this article is assuming that the people being referred to who are spending/saving/paying off debt have the income in the first place to do that. Not that I agree or disagree, I’m not really sure what people should do right now. But if people keep losing their jobs their bills and debts will keep growing and with their inability to pay… I guess that’s when people start filing for bankruptcy and losing their houses.

  10. 10 Gilberto Vazquez March 18, 2009 at 11:49 PM

    Its really tough times when people dont know what to do with their money. Should they spend or save? its hard to do anything if you dont have money in the first place. especially all those people that live paycheck to paycheck. its tough to spend money on other goods when u only have money to keep a roof over and you. For the more fortunate folk that have more cash to play with then you would think that they should spend. It will help the economy improve.

  11. 11 Andrew May 12, 2009 at 4:45 PM

    I think paying off debt should be more emphasized than savings. You can’t save what you don’t have. If you are debt free, then you can start building a reserve for yourself, otherwise you are just endlessly working to pay the bills. Being debt-free is the easiest way to start saving, but also spending frugally will also help with money management.

  12. 12 Nirbhik Trehan May 13, 2009 at 11:07 PM

    i think we should give more emphasis to paying our debts rather than saving money. because we can not save logically speaking if we are in debt as the money we collect has to be paid one day or the other and if we don’t pay our debt on time we can increase the amount of debt.we can start saving when we are out of debt and this will workout even more better.

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