The people with money aren’t spending
This blog is intended to be part rant, part tongue-in-cheek, and part discussion. This is part II in my series of seemingly common sense solutions to our current economic problems. Part I can be found here Wealth transfer
Over the last decade or so we’ve witnessed some of the largest transfers of wealth right before our eyes. This transfer went straight from the have nots to the haves. How did this happen?
Most fools know that while spending went up exponentially, inflation-adjusted wages remained stagnant. Therefore, all these extra spending occurred through loose usage of credit. Debt became an everyday part of life. Debt was used like income. Instead of saving their salary increases, people leveraged their salary increases. If I said something like “I cant afford it”, people looked at me like I was crazy.
You can’t really judge these people. Financial advisors were advising them against paying down debt and encouraging them to leverage what extra cash they had in the stock market. “If you are nearing retirement, don’t pay down your mortgage, invest that money in the stock market. It will always go up.” Now you have retirees with depleted retirement accounts and houses in foreclosure. (Ed McMahon comes to mind)
The result was the personal balance sheets for the majority of the have nots went negative. This was ok, until the unlimited flow of credit stopped. Where did the money go?
Contrary to what the media would have you believe, the money did not disappear.
The profits from consumer spending went right into the hands of the top 1%. The money not only came from consumer spending, but also from the government in the form of tax cuts. Did the government have the money to give to the top 1%? No. This was evidenced by the constant deficits during the previous administration. While the have nots were spending, the haves were saving.
Our paper gains in our 401k’s and brokerage accounts may have disappeared, but the money did not (at least not completely). The markets are currently set up so that regardless of which direction the market goes people can (and will) make money. For every stock that lost 90% of its value, there was a put or short against stock that gained value. Not to mention the short and ultrashort ETFs that exploded in value over the past year. People made money last year and lots of it. So who should spend?
It should have been obvious to any competent economist that spending based on false wealth is unsustainable. Have nots are called have nots for a reason. They have not the money to spend in order to sustain our economy. So its only natural for the have nots not to spend. Yet our political leaders are doing everything in their power to try to squeeze blood from a rock, if you will, by encouraging already tapped out consumers to spend what little money they do not have. On top of that, the government is spending itself into oblivion trying to stimulate the economy in hopes that Keynesian economics will save the day. Any competent economist should know this government spending is unsustainable.
But what about the haves? What is their excuse? I hear stories about the upper echelon cutting spending. For what? Are their mansions in danger of foreclosure? Do they have to worry about being laid off? Are they worried about gas prices or food prices? I think not. I can understand them being cautious about investing right now with this crazy market. But spending? Come on! I think it should be left up to the haves to stimulate the economy. The upper echelon needs to take the stranglehold off their funds and spend spend spend. Go on those vacations. Go out on those shopping sprees on 5th avenue. Buy the newest cars. Go buy a new yacht. I mean seriously, live life for crying out loud! Live the life that we have nots can’t live. Are you worried about the media? Them buy them off but for crying out loud buy something! Your money is doing no one any good sitting in your Swiss bank accounts. I know that ponzi schemes like Madoff have fractured the psyche of many rich folks. But that ponzi scheme (and numerous others) is a result of something I’d like to call “lazy investing”. A subject I hope to cover in a later blog.
I almost feel like I need to have an intervention with rich people. I’d say something like “Go ahead. Let go of you purse. Its ok, you can do it! Oh no, pay no attention to the economic carnage going on around you. Just pretend it isn’t there.” Slowly but surely this money would leave these peoples accounts and actually get circulated like it supposed to. Whoever can come up with the idea that gets the big money off the sidelines will be a billionaire. Maybe that should be the next Fool contest.