Loree's Economics
Let the economy correct itself

Some people are armchair quarterbacks... from time to time, I like to be an armchair Fed Chairman!

I have been watching the news lately about the stock market melting down. It's depressing, but the expansion had a bad premise in my opinion.

The U.S. government is going to give an aid package of $800 to each american as a way to pick up the economy. And as the commentators have nicely said, "people will go to walmart and buy potato chips and IPODs".

That's not going to pull a country out of recession.

THE PROBLEM: TOO MUCH DEBT: NOT ENOUGH SAVINGS
Americans are way too deep in debt. They're maxed out and can't really afford to spend much more. There isn't any elasticity left on their credit cards or lines of credit.

Americans Have:
Debt: $Trillions
Savings: Not Much

The best thing for Americans to do is to save their money, and get in control of their debts.

It made the news (Bloomberg) on Jan 11 that American Express was showing a write down of $275 million due to customer defaults.
American Express dropped $4.92, or 10 percent, to $44. The company said it will take a fourth-quarter charge of $275 million to cover rising customer defaults.

This means that the credit situation in the U.S. is not only affecting the mortgage market, but also the credit card market.

And.. with the looming recession there are starting to be major lay offs announced..

Layoffs mean that bills won't be paid "up-to-date and as agreed".

WHAT HAPPENS IF PEOPLE SAVE THEIR MONEY?
Individuals socking away money for the future is really bad for the economy. It's not actually what the governments want, or what big businesses want.

When you save your money, you're not spending your money. Plain and simple. When you're not spending your money, the big companies don't make money.. It's bad for the big companies and governments, and good for the consumer.

When you save your money, companies don't make their profits. If companies aren't making profits, they lay off employees. Governments are affected as these laid off employees don't pay taxes, and with lower earnings, the government doesn't receive as much corporate tax.

HERE'S WHAT THE CONSUMER SHOULD DO
In my opinion, the consumer should take a few years off from spending. They should pay down their credit cards and lines of credit, and put some money in the bank. They should correct their household balance sheet.

If the government hands out $150 Billion ($150,000,000,000) in aid to Americans, consumers should take the money and pay down credit cards.

SAVINGS ON $150,000,000,000 OF CREDIT CARD DEBT AT 18.9%
Let's see... if Americans took all of the money that the feds gave them and paid down their credit cards they would save
$150,000,000,000 x 18.9% = $28,350,000,000 ($28.3 billion) in interest charges. (Bad for the credit card companies)

Consumers would earn money on the savings if they put the money in the bank instead.:
$150,000,000,000 x 2% = $3,000,000,000 ($3 billion)
This assumes that people would get an interest rate of 2% from their banks. (Bad for the banks)

If consumers saved this money, big corporations would get $0.00 of it. Goverments would get less tax money.

Saving money and paying down credit cards is the CORRECT solution for the consumer, however, it is the wrong solution for the ailing economy!!

Consumers need to take a spending holiday for a few years to repair their personal balance sheets. I hope they start to take action in the coming months.