If people stop spending money that they don't have and start paying off their debts, won't the economy spiral?

Question

I haven't had as much time to study economics as I would have liked. Please tell me if I'm going in the right direction.

We all know that when consumers go into debt, they are borrowing against their future earnings. But when consumers start taking responsibility by spending less and paying off their debts, as expected retail sales will drop, but there is actually no national economic benefit to this increase in consumer responsibility. In effect, while the consumers were borrowing against their future earnings, the economy was being stimulated and supported by those same future earnings. So an economic slowdown will be inevitable unless there is a substantial increase in the number of exports compared to imports, right?

Answer 1

You are right.  To recap. Consumer borrows againts future earning, buy more expensive house, since we don't have savings the government will have to borrow money by issuing treasury/bonds to foreign investors from countries with high savings rate. Then price of oil shoot up, the value of dollar goes down.  With an imminent inflation, interest goes up, debt got too expensive, people start defaulting mortgage, everything is affected and the economy starts to sag so does the value of the dollar. Our saving grace is that US goods and services are competitive and highly marketable.  The dollar devaluation made those good cheap in international perspective hence export go up.  Hopefully, export revenue will be enough to counter act the slack in domestic growth.  But then again when USA goes the whole world will tank.

Increasing savings while it hurts consumption in the short-term will be beneficial in the long-term. What we will have is a stable growth.  Future economic shock will have less impact because of huge savings that will serve as a buffer.

Answer 2

Money can also be spent on investment and because  people in the US do not save  our   investment is financed by foreign investors. The problem is that  switch for consumption to investment  causes  temporary  problems but in the long run  our economy will improve if we have more savings. Our trade deficit   was due to the  high value of the dollar  that was maintained by the cash flows into the county by this foreign investment and  now that  these flows  have fallen  the trade balance  is improving which will make the dollar stronger.

Answer 3

Very good.You are correct.Here is the current problem.

We gave away all of our mfg.jobs to other countries,making us consumers of everyone else's products .Now it gets interesting because we have nothing of our own to purchase and with the oil prices the way they are people are up giving restaurants,clothes shopping etc. they are only buying the basics.Now comes the layoffs in all sectors of the economy and because all those countries that we gave our jobs to will suffer the same as us.We won't be able keep borrowing money from these foreign countries because when their economy goes down so goes their money.

You are also correct about exports but what is there  left to export like days past?

Always remember this. Our government will change the rules rather than have another depression so we might just sit back and wait to see the new economy evolve.

Answer 4

no, i haven't studied economics or such but i believe it would work out to something like this:  

credit card companies, banks, and such would be earning less money because they would be collecting less interest off of debt so the credit industry may lose ground.  this would leave consumers with more spendable income and leave creditors with less.  prices for luxury items may fall because people would be more concerned with paying off debt instead of borrowing on future earnings to get these items.  other industries, such as the real estate industry would experience boosts because more people would probably be able to purchase a home since they have less debt and presumably better credit.  

so the economy will change with some industries going down and others up but i dont think it would mean a recession

well thats my 2 cents

Answer 5

You pretty much answered you own question. In a word, "yes."

Answer 6

errrm the US government can afford to spend US tax payers Billions to invade Iraq for no discernible purpose while US citizens are spending money they don't have...