Consumers are spending more and saving less, and magically the economy is in recovery mode. By the way, that's basically Ben Bernanke's plan for recovery: get consumers to do more of the things that got them into trouble in the first place. But if I were you, I'd do the exact opposite.
To boost the economy, Bernanke (and the Fed) need consumers to save less and spend more. Why? Because consumer spending is 70% of our economy. Consumers have to spend more or the economy won't grow. We've already seen the savings rate dip again and consumer credit balances expand. That's heralded as good news for the overall economy, but it's of course bad news for the average family's finances.
In general, Americans already carry too much debt and save too little. Most families should be saving more and spending less. But if everyone did that, the economy would be in a bigger hole. Our national economy can't afford to have everyone cut back.
- This is a major public policy challenge because Americans entered the recession in such poor financial shape. If we had all been saving a lot and not carrying much debt, then encouraging us to loosen our wallets to boost the economy is a pretty good idea. When interest rates are low, there are deals to be had, and people with money can jump on those deals and spark a spending recovery.
- But we didn't come into the recession in good shape. We were in terrible shape, which means we don't have the financial cushion necessary to cut back on our savings and boost our spending to help the overall economy. Boosting spending and taking on more debt just makes it worse.
The Fed does this by keeping interest rates as low as possible so people will feel comfortable borrowing more money. They've also made it very, very painful to save money because savers can't earn much of anything on their investments. This encourages people to spend instead of save; and if they are saving, to abandon their safe assets for more risky assets in search of higher returns. It's all backwards, and pushing consumers into more trouble.
You might wonder why I would advocate an agenda of cutting back if it would be bad for the economy. Well, first, I know that very few people will actually follow my suggestions. That means the economy will recover as more peoople save less and spend more; that's the current American way, and how we have approached just about every financial problem in the last 30 years.
But that creates an opportunity for those who want to save more and spend less. As they save and invest, and the economy recovers, their retirement plans will grow. And those who follow the consumerism at any cost path will find out they aren't much better off 10 years down the road because they didn't save more and spend less.
Bottom line. Let Bernanke worry about the national recovery, and you do what has to be done to improve your personal finances. He's got his job, and you've got yours.
Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.
Above material does not constitute financial advice. Consult your individual advisor prior to making any financial decisions.