Save Your Money or Save the Economy?

Can you face economic reality? Or do you want to delude yourself and believe political propaganda?

With high unemployment and underemployment, widespread home foreclosures and loss of financial security Americans struck hard by the Great Recession face an economic conflict. More and more people have switched from a desire to spend money to saving money, at least for those that have any money to save.

At the personal level that seems rational and necessary. But when millions of people behave that way national consumer spending remains low, which means that the economy that is 70 percent dependent on consumer spending cannot recover. What a vicious quandary this is: a kind of Catch-22. It is called the paradox of thrift.

High interest rates on credit cards have also contributed to reduced consumer spending. And no matter what propaganda is pumped out of Washington, DC there surely is no way that millions of new jobs are going to be generated for a long, long time. That will keep disposable incomes down for a large fraction of the population and continue to promote a saving rather than a spending mentality.

Here is some important data from a recent Gallup poll that reveals changes in consumer psychology.

Six in ten Americans (62 percent) now say they more enjoy saving than spending -- while 35 percent say the reverse. Men and women share the same mentality and there are no significant differences across income levels and geographic regions. But those who are not married (39 percent) are more likely than those who are married (31 percent) to say they more enjoy spending. Younger Americans aged 18 to 29 (43 percent) are also more likely than those 50 and older (29 percent) to enjoy spending. Perhaps the most surprising finding is that liberals (45 percent) are more positive toward spending, compared to moderates (35 percent) and conservatives (32 percent).

What are people actually doing? Nearly six in 10 Americans (57 percent) now say they are spending less money in recent months than they used to, up from 50 percent last July and 53 percent last April. Thirty-eight percent of all Americans say this reduced spending will be their new, normal spending pattern while just 19 percent say their cutbacks are temporary. Women are more likely than men to say they are cutting back and that this is a new-normal spending pattern, and middle-aged Americans are more likely than those aged 18 to 29 to say they are spending less.

When you understand these findings it helps you discount a lot of news stories that frequently appear about changes from month to month in consumer spending. The Commerce Department loves to put out stories about monthly increases in consumer spending. The other day it said that it had increased 0.5 percent in January. Is that a sure sign of real economic growth and recovery? Absolutely not. With this increase came a decrease in the saving rate to 3.3 percent, down from 4.2 percent in December and around 5 percent in much of 2009. None of this can be explained by higher household incomes.

The more likely explanation is that there has been a lot of pent up consumer demand for all kinds of things as eventually people must replace many items that break or wear out. And for some people the rising stock market may have created more optimism about spending. But the underlying consumer psychology remains negative for the kind of consumer spending that pumped up the economy and corresponded to an almost zero saving rate prior to the Great Recession.

Without massive job creation there simply is no sound reason to believe that the American economy will really recuperate because of widespread increases in consumer spending. Nor can consumers borrow like they once could either by using credit cards or tapping home equity. Sound pessimistic and gloomy? You bet. And nothing the Obama Administration is doing is likely to turn the economy around and Congress will keep spending money that comes either from borrowing money from China and other countries or, increasingly, by the Federal Reserve just printing more economy. Inflation is bound to hit eventually and when it does consumers will be in even worse shape, especially because unemployment and underemployment will likely stay at historically high levels.

Nothing but continued delusional prosperity in our delusional democracy in our future, and electing different Republicans or Democrats will not change anything. Save your sanity, even if you have no money to save or spend.