Saturday, July 4, 2009

True Independence

The New York Times ran an article last week that tried to make a case against the rise in the U.S. savings rate, which has just reached 6.9% after bottoming out at less than zero percent during recent years.

So, if I understand correctly, it was better for "shopping malls, Main Street businesses, large employers and workers" when everybody spent as much or more than they earned. It was better for the nation for its citizens to live paycheck to paycheck rather than guard something in reserve. It was better to constantly bail water out of the sinking boat with a bucket than to patch the hull breach. 

Why is saving more a bad thing? The perspective described by the author of the NYT article (which may not represent his personal opinion) is an extremely short-sighted way to look at the problem.

It is true, the nation is being forced to swallow a bitter pill right now as consumer behavior adjusts to the changing environment. But the fact is, our prior behavior was unsustainable. One cannot survive for any meaningful length of time by spending more than one earns. Plain and simple.

How bad would this recession have been if we all had 6.9% of our personal income stored away in a CD or a savings account somewhere?

There are essentially two ways to improve one's personal finances: earn more or spend less. With 9.6% unemployment, it is fairly evident that we can't always control how much we earn. But we have full control over our personal spending. The American consumer has once again demonstrated rational behavior by trimming some non-essentials from his budget - wearing last year's fashions, driving the car for an extra year or two, and vacationing closer to home.

Once personal savings accounts are replenished, the money will begin to flow into the marketplace once again. The economy is currently like a heavy smoker or druggie that is trying to free himself from addiction. Our economy was addicted to easy credit and cheap, plentiful cash. We're weaning ourselves away from that. Yes, it's tough to endure in the moment, but we'll be much better off in the long run.

The most troubling aspect is that the Federal government does not appear to have grasped this concept yet. It continues to 'fight' the recession through ever-increasing spending packages. If I thought Chase would forgive my credit card debt by virtue of me borrowing still more money from them, I'd have done it already. The government needs to understand, as the American people do, that indebtedness is equivalent to slavery.

Freedom has a definite price. Our ancestors paid that price to win independence from their English overlords. The price of economic independence is responsibility and restraint. 

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