America has long been described as a nation of over-consumers. This has been talked about in the media for years. We (and don't take the "we" personally, please, because I don't necessarily include you and I certainly don't include me) shop for fun, for relaxation, for entertainment. We carry huge loads of consumer debt. Our roads are lined with overblown malls and shopping centers. We have a zillion varieties of toothpaste, electronics, and everything in between. A drive through some suburban areas would lead one to believe that all Americans do is shop and eat.

Surely this must be a factor in the current economic situation, yes? But now that stores are closing, corporations are being bailed out, and jobs are at a premium, Americans have stopped spending so much. They've pared down their driving habits, stopped eating out three times a week, stopped spending $5,000 on Christmas, plan to drive their perfectly good cars for a few more years, etc.

This is what the financial experts have been advising for years: Quit piling on credit card debt. Tighten your belts! But are the economists (and those individuals with certain opinions on the economy) happy about this? No. They say the economy must be stimulated. And that means we should be out there spending. Patronize those restaurants! Buy yourselves new cars! Bring your wallets to your local retailers!

Maybe I need to read Economics for Dummies, but I find this confusing. Does the answer to our economic problems lie somewhere between the two extremes?

Susan

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.

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.

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 don’t teach people in basic terms how to handle credit wisely. Expecting everyone’s 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 doesn’t 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. It’s 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 don’t overreact so easily. Sure, it’s okay to use your credit card – just be certain you can pay it off next month without having to skimp on groceries. It’s 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. It’s really the only thing that works, because you either think the glass is half-empty, or half-full. I’m 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, we’ll have a lot of company to commiserate with, LOL.

We can’t 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. I’ve brought this up in insurance discussions, but it is true for all financial situations. You CANNOT eliminate all risk from your life. It’s 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 we’re positioned where I think we should be for the 6-18 months ahead. Yes, I’ve 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 won’t 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, we’re 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.

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.

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.

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.

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.

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

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

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.