Tuesday, November 25, 2008

Built on a House of Debt

Generally speaking, the financial advice given by people like Dave Ramsey and Suze Orman is basically smart: if you want to get moderately rich (even on a modest income), cut up your credit cards, don't borrow money to buy cars and other expensive toys, live on less than you make, and save like crazy. However, I have sometimes joked that if everyone followed that advice, it would wreck the economy.

While current spending and savings patterns are being driven less by wisdom than by fear, something like that may now be happening. As Robert Samuelson puts it:

As stock and home values drop, Americans are scrambling to increase savings and curb spending....Everywhere, financial commentators urge "belt tightening" and more thrift. If the swing toward saving is too sharp, consumer spending wouldn't just weaken; it would collapse. Vehicle sales have already plunged. In 2005, they totaled almost 17 million; Global Insight's 2009 projection is 12.2 million. And these problems feed on each other. Lower consumer spending depresses profits and stock prices, which corrodes confidence, further dampens spending, raises unemployment and increases loan defaults. Credit card losses could be the next big blow to financial institutions.

Perhaps we could call it "The Ramsey Effect."


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