The financial professionals have floundered, as have we all

We can’t spend our way out of the recession

Monday, July 27, 2009
By Dr. Roger Gibbins

After months of unrelenting bad news about the economy, it is hard not to be just a little optimistic when, rather than the rain beating down, the sun shines and all seems right with the world.


Like an earnest gardener, media coverage focuses on any sign of a green economic shoot, any indication that things are getting better. Even if the news is that things are getting worse more slowly, and that unemployment is still rising but not as quickly as we feared, we breathe a sigh of relief.

However, our optimism is at best wary; we want evidence beyond warm days and long summer evenings. The challenge is knowing what to believe, and who to believe, in a deluge of economic news. Who can we trust amidst so much uncertainty? Who can give us the information we need to chart our financial course to safety in such turbulent waters?

For most of us, faith in conventional sources of financial advice has been badly shaken. Financial institutions and advisers provided little if any warning about the meltdown. The financial professionals have floundered, as have we all.

Given that we have looked to governments to solve the economic crisis, maybe we should also look to governments for advice on how to keep our own more modest financial boats afloat. Unfortunately, it is here that we confront a troubling paradox.

If individuals were to act like governments, we would maintain or even increase our level of household spending as part of our families’ stimulus package. We would support this increased level of spending by plunging further into debt, or back into debt, and remaining there for years if not generations to come. We would invest in infrastructure, perhaps a giant flat-screen television, home renovations or a new car.

We would not have a credible strategy for getting out of debt except for the hope that general economic conditions will improve to the point that our higher salaries and bonuses will melt our debt load like ice cream in the summer sun. (Does anyone really believe that governments can get out of debt without raising taxes?)

Following this model that governments provide would lead us to deep, deep trouble. Unlike financial institutions and automakers, we are not too big to fail, and fail we will. We will spiral into debt and then, when interest rates rise in the wake of inevitable inflation, we will be done like toast.

Doing just the opposite of what governments are doing means saving rather than spending. In this model we would trim expenditures to the bone, hunker down until the economy begins to rebound and then wait a bit more until the rebound is secure. We would make the car last another year, enjoy a staycation and look for the cheaper Chardonnay even if it is too oaky.

And yet, here is the paradox. If we turn our backs on the example provided by governments, the recession will last even longer. If the stimulus packages of governments are not matched by individual spending, then we are stuck. Even the massive, unprecedented deficit-fuelled expenditures of the American government will not be enough if individuals do not similarly throw spending caution to the wind.

If individuals and their governments are marching off in different directions to different drummers, as a country we may not be able to find our way forward.

So what will I do? Despite the clear summer skies and balmy weather, I will hunker down, with the possible exception of that oaky Chardonnay. If the economic recession lingers on, I will not accept blame that it is a consequence of my own caution. I may be a poor economic citizen by passing up on the infrastructure investment that a new flat-screen TV would provide, but hopefully I will survive to fight and work another day.

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