Tweet
Reading over the financial headlines today I notice that almost every story that talks about a recovery centers on the idea that we need to start spending again through credit cards, loans, etc. Many of us here at this site are frugal and save up cash for purchases. i'm just wondering, what would happen to our economy if everyone all at once decided to throw away their credt cards, get out of debt, and pay cash for most things? Based on what i've been reading, it could be absolutely devestating to the economy. I know Dave Ramsey has argued that it would be a good thing in the long term, but what do you all think?
-
Brian -
HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAOriginally posted by bjl584 View Post
now then....
No. The economy would be fine without debt, but it would take time for it to adjust to a truly debt-free society.
Debt, credit, loans, etc. come about because people, companies, and governments work with large sums of money that are unwieldy to hold all at once, and also because money streams are variable and difficult to predict.
For example.... John knows that he will get $X each month. However, his costs for one period in time between paychecks could be more than he gets in that one paycheck. Most of his monthly expenses (say, $1500 of $2000) are charged to him in the first half of the month (this is the case for me). However, his 1st-of-the-month paycheck can't cover that, so at this point, he has two choices: a) Build up a significant enough "backstop" funds to cover any possible costs that might come up, or b) Use a credit line (credit card) to cover those costs, knowing that he will eventually be able to pay off the credit line from income he knows he will receive later on. Preferably, yes--people would have plenty of cash in checking to serve as a backstop. But, let's face it, many don't. However, a person who lives this way can still totally afford their lifestyle, it's just that their expenses are not evenly spread throughout the month.
Now expand that to a huge company. Take Coca Cola, just for kicks.... Every day, their operating expenses are well into the millions of dollars range. Can they absolutely ensure that they will ALWAYS have that cash on-hand to pay their suppliers, employees, and so on? It would be hard, because they're not sure exactly when they'll have certain expenses and revenues. They have no control over when people buy their products, but they know approx what will eventually come in. So, they borrow the money to cover the daily expenses, and as revenue comes in, they can pay off the debt.
Sufficiently confusing? Basically, no... the economy wouldn't grind to a halt, and we're not killing the economy. However, if everyone suddenly stopped using credit/debt, things would slow down ALOT (for a time) until everyone (companies and individuals) was able to build up that sufficient back-stop to guarantee they'll have the money on demand. -
I agree that debt can, and is, used to "float" for people and companies with solid income who just don't have ready cash on hand.
I'm also interested in the question, though, of whether the frugality of people on this site and those like us is hurting the economy.
I think the answer is, no, we are helping the economy.
If we spent every penny we had, I think THAT would hurt the economy. Most savers have the wherewithal to weather financial hardship, within reason. If I lost my job (knock wood), for quite a long time I would still be able to buy groceries, pay my utility bills and my mortgage, pay my son's preschool tuition, pay my insurance premiums, maintain my car and my home, even buy some minor luxuries like the occasional ice cream cone for my little boy on a summer evening. All those things support the economy, keep people in their jobs, help the financial health of the companies I deal with, maintain house values for myself and my neighbors, etc.
I think we frugal folks help stabilize the economy, because we can continue our steady moderate spending in good times and in bad.
People who spend spend spend may pump the economy full of cash, but when times are hard they can't pay the bills, need more public services, can't afford preventive health care and so cost the system more money when they get really sick, default on their mortgages and credit cards which makes the banks suffer, etc.
PS. I am definitely one of those people who habitually charge essentials on my credit cards and use that 3-week "float" period before the credit card bill is due. I've tried to shift to using more cash, or at least my debit card, but credit is a hard habit to break. As long as I keep paying it in full each month, it's not a big deal, but what if one month I can't pay unexpectedly? That's how the real debt cycle starts. Scary.Comment
-
Actually I think the opposite.
By cutting back and not spending we all hurt a little bit more of this economy.
The rich are pouring everything extra into stocks because they are so inexpensive right now..... but the unemployeed, and the people with hour cutbacks, and the people with wage cutbacks are all hurting.
Here's a rather depressing article:
Comment
-
Personally, I think I'm better for the economy.
Every dollar I don't have to pay to financing, I can put toward investing (contributes to the growth of the companies invested in) saving (MMA or savings account which provides cash for that bank to loan), or towards other purchases.
By saving up and paying cash, we are able to purchase items that we couldn't afford if it included hundreds of dollars in interest.
An example, I just bought 4 new tires for my Jeep. The store had two options with a price difference of about $150 total. If I had to borrow the money, I would have chosen the lesser option knowing there would be interest payments involved. Instead I paid cash for the better item.
It saddens me that the talking heads would even say out loud that responsible living was bad for our health. It would be akin to criticizing exercise because fewer sick people has a negative impact on the health care industry.Comment
-
Originally posted by adam_c View Post
I'm not talking about saving up and paying cash as a detriment. Nor am I saying or implying that responsible living is bad for the economy. I have no problem whatsoever with responsible spending.
But on the other hand, I've seen rich folks ask for people to lower their hourly rates so that they can pay them less..... not because they are hurting, but because they believe they can "save" there by going elsewhere if these people that have helped them for years don't suddently cut their rates.
People are lowering everything right now just for work; and discounts and negotiations are becomeing very competitive. Nobody is really making a huge profit (if any) at the moment. But to me, it seems even the rich are taking advantage of the situation.
---
As an individual person I would like to know how you can help a company to grow by purchasing already issued stock? Distressed stock so to speak?
Stock really helps a company grow when it's newly issued stock, or no?Comment
-
That's a really good point. I've not changed my spending habits a bit over the last 7 months or so. Others, obviously, have been cutting back significantly. I think it really just swings both ways.... frugal people don't spur the economy or help it grow.... we just keep it alive when times are bad.Originally posted by TBH View Post
Comment
-
ummm....?
my understanding is that the economical crisis was caused largely due to the fact that there were so many people out there taking on huge debt, spending so much money that they could no longer afford anything, then defualting on all their loans and then not having jobs and being unable to spend ANY money. so... forgive me for dumbing this down, but aren't those people are the MEANING of the words 'boom' and 'recession'?
so how exactly are frugal people NOT helping, when they are the ones who have not changed their spending habits at all? when they are the ones who are still able to spend their money like they always have? would you rather EVERY single person in the world behave like the mass-consumerists that have caused the crisis in the first place? i can't even begin to imagine how much worse a state we would be in.Comment
-
Hello Seeker,
There may be some mis-communication. I wasn't disagreeing with you, I was responding to the original posted question.
I don't know any of these rich people you speak of, and I'm definitely not one of them, so I can't speak for them.
But on a personal level, if I invest $100 in the market that wasn't there yesterday then the market has grown (assuming the seller of that stock put the money into something else rather than pulling it out in cash).
My contribution makes the pie bigger and increases the value of the shares. Similarly, if every one suddenly stopped investing, no one would say that there was no negative effect simply because the number of shares available hadn't changed.Comment
-
I'm confused buy this. Unless it's an IPO or a corporation offering stock, when I buy a stock, I am not buying it from a corporation, I'm buying it from someone who is selling it. I mean right now I'm sure with the low prices a lot of people are buying stock...but how is this helping the growth of struggling copmanies? I guess I don't understand how the corporations see this money?Originally posted by adam_c View PostComment
-
Credit cards have only been around for what? 30 years or so now? The economy was fine before them. It should be fine after them. I do wonder how mortgages were handled 50+ years ago though.Comment
-
we may have been fine without them, but i would never consider not having one.Originally posted by myrdale View Post
do you have a car? 200 years ago we were 'fine' without cars too.
people just need to understand how to use them and exercise self-control - and those who can't shouldn't have them in the first place.Comment
-
actually, saving is very very good for the economy.
if everyone saved money, what would happen? where will they put their money? in the banks.
when banks have all that mony, wha would they do? they would want to grow that money so they can pay interest, so they lend out and invest, in businesses, then businesses will provide jobs to people, and the economy will grow.
this is how the economy in japan and china grew, because they saved alot. saving is great, please don't buy into the notion that consumer culture is great for the economy, that's BS.Comment
-
Then again, those banks may be in trouble if nobody wanted a loan, since we are assuming that everyone saved and no one had any debts anymore.Originally posted by segmond View PostBrianComment
-
Short term, the economy would be horrible. Less spending leads to less production and jobs. Much like what is happening now,a wide-scale reduction in spending and more saving.
Longterm, we would have a shift of wealth, the rich and poor would slowly shift to the center. Better financial managment of the poor and middle class would mean less money paid in interest and more earned, this in turn would mean less interest earned by the rich. This would correlate to more investment dollars for the poor and less for the rich(The rich being those who earn money from interest and investments). IMO.Comment
Comment