What would happen if we paid off our debts?

Today's topic is... what would happen to the economy if we paid off our debts and built cash reserves?

The economy is in rough shape right now. We've all enjoyed living a high lifestyle during the credit boom. Now we're all suffering from the debt hangover that we've created for ourselves.

The question is: what would happen if every body all of a sudden got smart and started to live in a prudent financial manner? What would happen to our economy if we said no to more credit, and yes to building up our cash reserves?

Here's the short answer: It would be completely devastating to our consumeristic economy.

Let's say we took money from our pay cheques and immediately started to pay down our debt and put money into savings. Let's also say that it will take us 5-7 years to pay down our debt.

Let's also say that we're not going to buy another consumer item on credit. PERIOD. We can only buy consumer items with existing cash reserves.

Are you getting the picture here?

If the goal is to pay off debt and put 6 months of cash reserve in the bank, how long would that take the average Canadian to do so? That will take years of patient saving to do.

Meanwhile, the consumer companies that have relied on our credit will quickly go bankrupt. The retail stores will have serious issues because people will stop shopping there.

Oh yeah, most of these consumer manufacturing companies and retailers are built on credit. Many of the big box companies such as Circuit City (bankrupt), future shop, linens n things (bankrupt) are built on credit.

If consumers don't come and buy their products, they won't be able to service their own debts, let alone sock away cash reserves for themselves.

SEE: MSNBC -What if we all paid off our credit cards?
Even if we could all get to this “debt-free zone” unscathed, we’d still have to contend with an economy that was no longer lubricated by credit. Credit cards aren’t just convenient: they actually create spending power that is then used to buy goods and services. If you sucked all that spending power out of the system all at once, you’d risk creating a huge deflationary backdraft. Yes, people who still had jobs might have more to spend. But there would be much less spending power overall because many more people would be out of work.

It's a very contractionary situation.

Companies are doing the same thing as consumers. They're binging on the business drug (OPM) Other People's Money ... better known as debt.

It would literally be a decade before the economy saw any growth, if we went to a low credit and high cash reserve system. While this is the right thing to do, it's certainly not painless.

Why haven't we learned these harsh lessons before? Because this is the first time that consumer credit has been available to us in this abundance. It's been our first time in serious trouble with high debt.

It's take 15-20 years to get ourselves into this situation, however, we are here, and we need to have a look at the problem.

IMO... we don't need government's stimulating the economy. we need them to help us pay down our debts, and build cash reserves. That's what the government should be doing as well. Especially in bad financial times.

Again. to answer the question:
What would happen if consumers started to pay down debt and put cash reserves in the bank. It would ultimately fix the economy and make it the way it should be. Zero debt and cash in the bank. That's the ultimate dream.

Zero Debt and cash in the Bank.
Are we willing to go through a little financial pain in order to achieve this objective? Are we willing to not buy the fancy consumer items to achieve this goal? I think we should.

I would love to live in a society that has zero debt and money in the bank. People wouldn't be as stressed out, killing themselves to pay debt. We would have more time for the really valuable things in life.. our family and friends.

I think the real things in life are more valuable than bailing out companies.
Just a quick opinion.

Questions talked about in this post?
What happens to the economy if we pay down our debt?
What's it like to be debt free and cash in the bank?
How long would it take Canadians to pay down their debt?