Tag Archives: Stimulus

Stimulus is the Opposite of Savings

When I was a child I was often told that saving your money was a good thing. I wasn’t an economics whiz kid, but this seemed to make sense; if you save your money and don’t waste it today, you’ll have more to enjoy in the future.

In the big picture of the economy of a country, the total savings of the population leads to future economic growth. When an entrepreneur has a new idea for a company that will produce a product that will be of some benefit to the population they often need to find money to get the company started. This money often comes from either investors or a loan from a bank. In both scenarios the source of the money is derived from savings.

During the 2008-2009 economic collapse, stock and home prices plummeted. This was a correction to a bubble economy based on American citizens consuming too much and not saving enough. For example, the housing bubble was a result of more people becoming home buyers than what would be considered normal. When there were no more people left to buy houses, or not enough to keep up with the normal flow of home sellers, the bubble popped and home prices plummeted. Though for some individuals this was an awful financial event, for the country as a whole this was a necessary correction.

During this correction it became harder to get a loan to buy a home as banks faced huge losses as previous buyers faulting on their loans. The savings of the country had dried up. So now it was time for citizens to start saving again and to cut back on spending. Just as I had realized when I was a child, this would mean sacrificing in the near term for future wealth and consumption.

Unfortunately the idea of sacrificing today for the future is not a message that most politicians have the courage to promote. Instead, a much easier to propose a stimulus plan that promises to get the economy moving in the “right” direction again. If savings means sacrificing today for the benefit of the future, than it stands to reason that spending today is doing so at the expense of the future; stimulus is the opposite of savings.

This idea that stimulus has consequences is lost on the politicians that approve the funding, the liberal media that covers it, and the people who benefit from it in the near term. The recent stimulus that the government pushed in response to the 2008 collapse was intended to push home and stock prices back up, which it has been successful in doing. However it is important to remember that the prices of stocks and houses decreased for a reason. It wasn’t some type of phenomenon that just happened one day. The decrease in prices was a necessary correction as more sellers were present than buyers. Stimulating the economy to make the prices go back up is simply just pushing off another price decline into the future, except by pushing it off the problem is snowballing into something bigger than what it would be if it happened sooner, or when it should have.

Again, the act of saving is a sacrifice, it is tough. The act of stimulus is easy, it is equivalent to swiping the credit card and worrying about it another day, but eventually that day arrives. The U.S. government has a national debt (credit card bill) of over 17 trillion and deficits that are constantly increasing the overall debt. So where does the stimulus come from? It comes from more borrowing (credit card swiping).

Common sense should tell us that stimulus, the easy way, will have consequences just as an individual racking up credit card debt that he can’t pay back has consequences. This is the point I am attempting to make in this article. When President Obama and other politicians brag how their stimulus programs have saved the country it is important to understand that the day of reckoning is coming.