Another Bubble? "Overspending Threatens Economic Recovery"

[avaistheone1]

Massive government intervention has helped stop the economic decline, but it also has slowed the closing of the imbalances that pushed us into the recession in the first place, consumer overspending among them.

With savings rates near zero and debt levels hitting a record high of 120 percent of annual income at the onset of the recession, spending had to come down. And it did, with the expected results for the economy. Now personal savings rates are running slightly over 3 percent of income - still too low, but moving in the right direction. More importantly, consumer spending is on the rise as well, which is clearly good for the economy in the short run. But the fact that spending is up should raise warning flags. After all, real income was battered by the loss of jobs and has yet to recover. How can Americans be spending and saving more even as they earn the same amount?

That good trick came via the record tax cut Americans received in 2009 as part of the stimulus program. Americans had been paying roughly 12 percent of their income in taxes at the start of the downturn. Last year that number was down to a record low of 8.8 percent.

http://www.americanbanker.com/usb_issues/120_5/overspending-threatens-economic-recovery-1018031-1.html




Although I certainly don't agree with all of it, this article raises some important points

[high density]

1. People would save more if they had better incomes

They can't complain about savings rates without first acknowledging decades of flat wages for the middle class. Lousy "real income" isn't a new phenomenon that suddenly showed up in this recession.

[Kurt_and_Hunter]

2. Saving is valuable long-term but destructive short-term

So I am glad people are doing the "wrong" thing right now.

We will see how this economic event affects psychology long-term.

(I will probably be a little more thrifty for the rest of my life.)