Saving money vs recession

I originally posted this as a comment on Kacie's blog Sense to Save.

I'm in a pessimistic mood about the economy right now. Typically, the advice given to individuals in a recession is to cut back on discretionary spending and save. Unfortunately, that responsible behavior may be just what makes the recession worse.

The problem is that the economic growth we’ve had over the past decade seems largely driven by consumer spending. The reason the economy didn’t drop into recession a few years ago is because people didn’t save — they spent money on all sorts of stuff. Greater savings would result in lower consumer sales which would translates into recession earlier.

The problems are two fold. First, a significant portion of that spending has gone to overseas manufacturers, rather than being fed back into manufacturers and labor in the US, to be then spent on more consumer goods in the US.

The second is that it seems we’ve built a giant Ponzi scheme to keep the economy going. We can stay out of recession as long as people keeping acquiring debt to drive the economy forward. Eventually, though, credit dries up, less money comes in from consumer spending and we end up in recession or worse.

Increasing savings is exactly what individuals should be doing. Unfortunately, if people do what they should, we are likely to have problems at the national level.

I don’t want to see a recession, but that may be what it takes to reboot the economy.