I like your post, it makes so much sense to me.

We've always been conservative. Every house we've ever bought we've put at least 20% down...as we got older, we put even more down. Always drove our cars for years after they were paid for...enjoying not having a car payment. So...right now things seem the same to us. I don't notice any hardships. We are just living like we always did.

Do you understand what I'm trying to say? I do know there are a lot of people having a tough time right now...through no fault of their own, but I also think there are a lot out there that got in way over their heads by living beyond their means.

I'm curious to see what others have to say on this subject.

Confusing? Yes.
I just posted on the Suze Orman thread, so I won't repeat all that here.
Let's see:
my grandparents house burned and they didn't have insurance; that would have been around the depression. Their desire for their children to have more meant better education and a nice home but certainly no McMansion.

I am sure that was the desire of most depression parents.

But, look at what has happened since:
-jobs have been sent overseas - less money earned and less taxes being paid into the system;
-wars (Korean,VietNam, Desert Storm, Iraq and Afghanastan)have eroded the treasury;
-free trade instead of fair trade has increased the influx of cheap goods with little going out because our manufacturing jobs went overseas
-credit cards came into existence and at that time encouraged by having the interest tax deductible!
-even the current housing foreclosures was caused by overzealous (read greed) lenders who may have told buyers that their incomes would increase to cover any increase in payment, that the house would increase in value, etc.

So basically the government has single handedly pushed Americans into this situation. Now they are acquiring the big banks, and wanting this global economy. Remember Bush wanting to unite Canada, Mexico and the US, much like the EU?

Personally, DH and I have not "bought" into the materialism, we own our home, own older cars, and are doing well. We have a snag coming up; the company my DH works for was bought out, and his plant is closing in 3 months. We aren't ready for retirement just yet, but may have to do so anyway.

Hi, Susan! Your thoughts are always welcome, any time. You point out an obvious and jarring contrast to what the popular media is saying.

One of the reasons I've become a believer in bringing financial education to the schools is that my DH and I have made our own share of financial mistakes. Some of them got bailed out by just plain dumb luck, some of them we had to buckle down and deal with.

The great influx of information now available on the Net will help the younger generation, I hope, to deal better with the complex financial issues that we all face, in varying degrees.

IMHO, using credit wisely is one of the issues that many people have. We dont teach people in basic terms how to handle credit wisely. Expecting everyoneÂs parents to do has obviously not been effective. And frankly, the world is a lot more complicated than it was 50 yrs ago, so the advice they passed on doesnÂt always cover modern-day situations. My parents never gave me any advice, good OR bad. Talk about self-education being a painful process!

There are good ways to use credit (building a solid credit history, buying a house or car) and bad ways (getting in over your head at 20+% annual interest, for example). This is just as true for businesses as it is for individuals. With a tax code so labyrinthine, many business decisions that affect us are made more for tax reasons than the old simple profit/debit accounting.

One of the consequences of "good times" is that people and businesses get overconfident. On the flip side, in "down times" like this one, everybody overreacts on the other side. Most people I know still have jobs, still have their cars and can pay for gas, still have a roof over their heads and grocery shop regularly. Yet many are scared to spend money, hunkering down like the next Great Depression is right around the corner.

Fear is always a major motivator in mass behavior: fear of missing out, of being left behind, of being too far out on the cutting edge, or of being impoverished. ItÂs all too easy to get caught in the herd mentality, I know  we bought our own house at precisely the wrong time in 1989. We were "underwater" for a decade. Funny how history repeats itself!

Being educated, instead of ignorant, enables people to see patterns, so they donÂt overreact so easily. Sure, itÂs okay to use your credit card  just be certain you can pay it off next month without having to skimp on groceries. ItÂs okay to have that Starbucks latte if you absolutely adore them, but budget for the annual expenditure  know where your money is going. Go out for dinner once a week instead of twice a week, skip a few movies and borrow your friends DVDs, and you can cover the expense just fine.

The best stimulus for the economy is confidence. ItÂs really the only thing that works, because you either think the glass is half-empty, or half-full. IÂm an optimist, so although we have scaled a few things down, we continue to buy books, go to movies, renovate the house, eat out twice a week. We have a good cash flow and the only thing that will interrupt it is if some major part of CA falls into the ocean. And if that happens, weÂll have a lot of company to commiserate with, LOL.

We canÂt do anything about the portfolio being down 34% and the house having lost 25% of its value. But since we have sufficient funds for the next 5 years, we hope the value of both will recover somewhat and that our net worth will improve. Since fortunately we do not depend on either one for cash flow, what they are worth today is really of no importance at all. Neither is worth anything until we cash out of them  so whether they fall or rise in the interim, is interesting but unimportant on a daily basis.

All one can do is plan to mitigate risk. IÂve brought this up in insurance discussions, but it is true for all financial situations. You CANNOT eliminate all risk from your life. ItÂs impossible, and the fear of risk is a major stumbling block for many people.

What understanding financial matters has given me is more confidence to deal with risk. If you consider various scenarios for the future, make a plan to deal with them, and remain flexible as life changes occur, it takes a lot of anxiety out of life.

I look at our portfolio reports not to agonize over how much the market has gone down, but to check in how the percentages have changed in our diversified allocation. I want to make sure weÂre positioned where I think we should be for the 6-18 months ahead. Yes, IÂve made a few mistakes over the years, and a big one last year in waiting too long to move out of equities. But having done so, it was a waste of time to worry about it; better to keep the shares and wait for the market to recover. And it will, sooner or later.

So we have cut back  I probably wonÂt get that pretty Lacanche Cormatin range I was lusting after, at least not this year  but the dishwasher still needs to be replaced, the back porch and stairs have to be redone, the garage door has to be changed out, etc. etc. We may go to the moderately priced Japanese or Thai restaurant instead of every-week splurges at three-star bistros, but we know we're fortunate to be financially stable after so many personal ups and downs.

Life goes on, and although we may not spend quite as much as before, weÂre still spending. Over the years we've managed to eliminate virtually all our debt, get our legal affairs in order, obtain sufficient insurance for death/survivor issues and long-term care, and establish a comfortable lifestyle. There were times I was sure we'd never pull it off, but we managed it. So although these are 'anxious times', our previous planning has proven solid, needing only a few 'tweaks'. We learned a lot over the years, and I just wish we had known some of this stuff a whole lot earlier, in our 30's.

Hi Susan,
I agree that it is confusing. The big difference between the advice to save more and to live within our means and the crisis we are now in is the unavailablity of credit. If we had suddenly become a frugal nation and stopped living beyond our means, we could still go to the bank to get a car loan if we got the urge to buy a car. Small and large businesses would still have credit avilable. Jobs are being lost now in record numbers, and far more than if we had just started cutting back on overspending. Also, the huge loss in the value of our retirement plans and in our housing values simply makes us FEEL more broke. If we had simply curbed ouverspending, we would be feeling RICH because we would have more cash available if we decided that we wanted to buy something. The advice to spend, spend, spend right now to get the economy going is a desperate attempt to jump-start the economy when banks are holding tight and not lending.

I saw the same correlation in air travel complaints - they (the media and government type people) were complaining about the larger airports being way too crowded with many near misses between taking off and landing airplanes. Then 9-11 happened and air traffic fell and the runways were more manageable, gas prices soared and air traffic fell again, the economy tanked and people stopped flying... now they're complaining that there isn't enough people flying! Yet our airways are safer with the lighter loads. Who do you believe? Is it black or is it white?

There is one variable to plug into the equation when comparing how things used to be and how they are today - there's a heck of a lot more people on the planet today. Just within my lifetime the worlds population has soared. When the only way to make money is through explosive growth you are living in a house of cards that will collapse eventually.

I'm doing fine financially. Never had much to begin with, I'm not missing anything.

Alisande I have had the exact same thought, thanks for stating it so clearly.

Suppose we all "reset" our consumerism level to 75% of what it was at the height of the big expensive party, permanently. We still won't need Circuit City and Best Buy both.

We are going to have to invent jobs in new areas or greatly expand employment in existing areas, and these areas need to be consumption-independent. This is why the Obama/Biden economic stimulus plan, although terrifying in scale, actually makes sense.

To paraphase G. Will (who was quoting someone else)

Thrift is good until it isn't.

Long term - it makes sense to reduce debt but in the short term, consumers need to spend. We need to gradually reduce consumption - the all of a sudden shutdown does not allow any time for transition.

Short term - if we reset to 75% levels of prior consumption - we will have a decade long period of no growth and contraction. Not quite the GD but a recession like none of us has ever seen. Maybe 15% unemployment and a 70% total drop in stock market.

Well said, David. A sudden sharp pullback causes more layoffs & lower profits for companies. A lot has been said about corporations being bad, etc. But they employee a LOT of people. It would take a lot of small companies to make up even the 5,000 worker layoff just announced by Microsoft.

So yes, the answer lies somewhere in the middle. It's good to increase savings. It's bad if most consumers just basically shut down & stop buying suddenly. That just leads to a sharper downturn in the overall economy & possibly a deflationary spiral. Consumers may view deflation as good because of lower prices. But as prices sink pressure mounts on companies to either lay off or cut worker salaries or benefits to cope with the reduced profit. Public companies have an obligation to their shareholders to keep their earnings & thus, their stock, up. Many of us are both employees and have either individual stocks or a retirement plan with stocks. We don't want our jobs cut but we want our 401k to keep growing. It's a balancing act.

I think that many companies go to one extreme or the other. In good times they overspend & overstaff. If things turn a little bad, they immediately react by cutting several thousand jobs. Microsoft was showing a decent profit, down only three cents a share from the prior year. In this economy their earnings report was excellent. But they still announced layoffs. Also companies & everyone else needs to understand that ups & downs are part of the business cycle. You can't expect to beat the prior year's profit every year.

I think fear is a major factor here. Everyone is scared of the future & everyone is reacting to that. We don't want to reset levels to 75% of prior consumption unless that's done gradually. David is right, it would lead to a massive & prolonged recession. Everyone just needs to be prudent. Have some money set aside, don't go so far into debt, but spend modestly. Consumers seem to have gone from spending like crazy to hardly spending at all.

"I think fear is a major factor here. Everyone is scared of the future & everyone is reacting to that"

EXACTLY!!!!!!!! I agree it pays to be prudent,but to completely stop "consuming", just continues to keep the downward spiral of the economy.

Thanks for all your thoughtful and informative responses.

I'm thinking with everything selling at deep discount all over the place, this is actually a great time to spend money. With that in mind, I've been doing my part as a good citizen. :-)

(I'm not kidding about the discounts!)

Susan

Susan, you quoted almost word for word what I've been saying in your original post. There must be a way to have a healthy economy AND people whose household finances are stable at the same time. Point me to that "Economics for Dummies" book.

My DH (who is a naturalized citizen from Hong Kong) is only half-joking when he says that the most potent weapons America has when dealing with its enemies are....Safeway and Wal-Mart.

Safeway/Wal-Mart/Trader Joe's have their pros and cons, but there is no denying there is no other country in the world that could have created them.

There are many things that need fixing in our country, but we could say that at any time, any decade. The capacity of America to continually re-invent itself is a real source of wonder and envy to both its friends and enemies. Let us hope we can continue to do so.