Economic growth depends on spending and paying bills on time

Wednesday, September 14th, 2011 By

Cutting credit cards

Cutting credit cards has become a national passtime. Image: SqueakyMarmot/Flickr/CC BY

Just a few years ago, credit cards were the way most of us lived above our means. But since the Great Recession of 2008, Americans have been working hard to wean themselves off of the credit card habit. And while that may be wise and responsible from the standpoint of personal finances, the good sense of these consumers does have a negative impact on a shaky economy that runs on credit.

Number of cards and balances drop

According to the Federal Reserve Bank of New York‘s August Household Debt and Credit Report, in the last year 199 million credit cards were canceled and only 168 million accounts were opened. The average balance of credit card accounts has also dropped by 16 percent in the last three years.

The paradox of thrift

On a personal level, this is good news. We are all becoming more responsible spenders. However, more money in individual accounts means less spending in the overall economy, and that hurts everyone. It is a phenomenon known as the “paradox of thrift,” which is defined by the Business Dictionary as:

“(An) economic concept that if everyone tries to save an increasingly larger portion of his or her income, they would become poorer instead of richer. This is because the economy will slow down from reduction in demand and the very same people would lose their jobs.”

Spending wanes with confidence

At the height of the recession, consumers drastically reduced their spending. As the economy began to recover, confidence returned and spending was back up again to some degree. However, recent events, such as the debt ceiling debate, the downgrading of the nation’s credit rating, the erratic stock market and the disastrous recent unemployment figures have made spenders nervous again.

Debt okay; delinquency bad

As credit card use has gone down, student and auto loans conversely have been on the rise, according to Daily Finance. Transportation and education are essential in the search for work in this troubled economy. However, as the loans have increased, so have their delinquency rates.

The nation’s economy grows with spending. However, spending more than we can afford leads to delinquencies, unrecoverable debt and bankruptcy — all of which are poison to the economy. The trick for us, as a nation, is to spend but to also pay off our debts on time.

Lesson of the Recession

For the economy to recover, we need to learn how to spend but not to overspend and go into spiraling debt. When all the dust has settled and the nation’s economy is strong again, that balancing act will, perhaps, be the lesson we have learned from the Great Recession.

Sources

Daily Finance
Business Dictionary
Federal Reserve Bank of New York

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