The current economic situation has created a consumer conundrum. On one hand, profligate spending and irresponsible levels of debt have created many crisis situations for individual consumers. Likewise, easy credit and the growth of sub-prime lending helped create untenable financial situations for many businesses. Consequently, consumers have decreased consumption and debt, and increased their savings rate, while banks and other financial institutions have tightened credit markets. The result has been a deep and sustained recession.
Now, the government is trying to encourage consumer spending in order to stimulate the economy. The recently enacted Cash for Clunkers and homebuyer credit programs are two examples of government programs designed to encourage consumption. What’s a consumer to do?
On one hand, spending above our means has helped create the problem. Now, however, we are told that spending is good to help stimulate the economy. The solution, though, is like the solution to much in life: moderation in all things. Thoughtful, moderate spending is fine. As is thoughtful savings and investment. The same axiom holds true for businesses. Out of control growth through high leverage can be just as damaging as stagnant sales and investment. Likewise, for government, deficit spending may be acceptable to achieve targeted, short-term objectives. However, on-going deficits of the magnitude we’ve seen so far in the 21st century are not a sustainable formula for success. Moderate spending, moderate taxation, and moderate monetary policy have proven to be in the best interest of Americans regardless of socio-economic class.
Unfortunately, our society is conditioned to instant gratification. People are looking to government for quick and easy solutions to large, complex problems. The best solution is not quick or easy. But it is attainable. The best solution would be for all of us – consumers, businesses, and government – to go on a ‘healthy financial diet’. Such a diet would consist of exercise (earning and saving money, paying down debt), healthy eating (long-term investments in assets and education), and the occasional junk food (decadent spending). It is only through moderation that we can all get back to a healthy financial lifestyle.