Pay off Debt to Help the Economy

by Sandy L on July 28, 2010

Thanks to my humble upbringings, I’m not a big fan of consumer debt. In fact, I’ll go so far as saying that lending too much money has hurt the economy, not helped it.

Many economists and even our President strongly disagree.

When  President Obama addressed congress last year, in the same breath, he said that banks not only caused the recession but are also the solution to it:

The flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.

But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.

Well, I’d like to take a moment to give an alternative point of view.  Although I’m not at the extreme of my mom who’s never had any debt, I think the economy would be a lot better off if people didn’t pay an extra 20%-30% for all the stuff they charge.

Imagine what the US economy would be like if everyone had an extra 20% to spend on goods and services? High Tech jobs would be created, people would either spend more on consumer products, or invest their money into companies who would grow these businesses. (In the interest of disclosure, I do work for a high tech mfg company and not a bank. Perhaps my opinion would differ if I did.)  I can attest that my family buys plenty of stuff, even if it’s not on credit.

I was happy to finally read an article in The Daily Middle that was in line with some of these thoughts.

So to all you guys and gals out there that are paying down those credit cards: Don’t let those economists convince you that you are part of the reason the economy is not recovering. Instead, be proud knowing that at some point in the future, you’ll actually be in a better position to support the economy because you’ll have more free cash to do so.

{ 5 comments… read them below or add one }

Money Reasons July 29, 2010 at 2:45 AM

I thought the problem stemmed from home buyers able to purchase homes that the could not afford because of legislation that the government put in place to enable them to do so…

Then after everybody started defaulting on their loans, CMO devalued, and foreclosures shot up everywhere like weeds, banks tightened access to credit.

Personally, I’ve been debt free for years (and just this year, mortgage free too). When the enconomy was faltering, I went out (and this wasn’t easy for me) purchased more than I typically do. The reason being, our economy need the cash to exchange hands to make the concept of money work. It wasn’t easy for me since I’ve very very frugal by nature…

This is my first time over, nice site you have here! I’ll be back :)

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Sandy L July 29, 2010 at 10:59 AM

Yeah, we were in the middle of our kitchen remodel when the economy tanked. I probably spent more money in 2008 and early 09 than I ever did. Luckily we had the money saved for it and we didn’t get laid off during that time.

Congrats money reasons on being totally debt free. You’re definitely right. The increase in subprime mortgages was a result of govt pressure to increase home ownership. But when no one was buying homes, I was hearing everyone telling me to go out and spend. I was definitely a great consumer during the recession, but I know I wouldn’t have been able to spend as much if I was in debt.

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Kellen December 25, 2010 at 12:07 AM

I’m trying hard to remember my economics, but I think that banks issuing loans actually creates more money in the economy? As in, more dollars floating around out there. Which is probably what they’re going for. They’ve done that themselves by having the Fed create money though.

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Sandy L December 25, 2010 at 7:10 AM

Kellen, I’ll admit, I don’t always get economics. I see borrowing as a temporary creation of money that has to be repaid at a high interest rate (for credit cards). I would think having to pay 20-30% back on the money you owe reduces your buying power long term. I guess you end up spending the same amount long term, it just doesn’t go to mfg companies but to banks. I suppose when you buy goods they have some residual value that can then be resold whereas that’s not the case with debt.

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Kellen December 25, 2010 at 8:13 AM

I would feel more comfortable in a world where our economy was booming and nobody relied on debt to make it that way. It just seems like now that we have such high debt, we can’t shrink it without shrinking the economy too. Or we’d just have to do it reeeeally slowly.

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