Is more spending the answer to the economic crisis?

The current economic ‘crisis’ seems to boil down to consumers all over the world spending more money than they actually have in order to sustain a lifestyle they can’t afford.

I’m not talking about some environmentally unsustainable lifestyle, but an economically unsustainable one.

If you go out and buy a new plasma screen TV with your credit card, sooner or later you have to actually pay the bill, the longer you leave it the more interest piles on top of the purchase price increasing your debt. Likewise a 30 year mortgage for a house that entails you paying twice the purchase price of that house in interest payments, then using the capital gain to buy a car with the paper value of your (well, actually your banks) asset, just makes no economic sense long term. This spiral of debt enables you to spend more than you earn each month fulfilling your lifestyle expectations. At some point it has to be paid for. You either need to earn more money, or at some point forgo material purchases in order to pay for everything, at worst you may have to even sell you house if it actually starts to drop in value thus not providing your lender with the security for all those other goodies you bought.

The expectations of consumers in both the ‘developed’ and ‘develeoping’ world is that their lifestyles will continue to improve, next year they can have a better car, a bigger house, a flasher TV. They now expect this and politicians know they are expected to deliver on this expectation or the consequences will be dire.

It doesn’t matter whether consumers demand this in a Democratic country or a dictatorship. The elected representatives know they need popular support to remain in power, and likewise the dictators in China know they could be thrown out if they fail to deliver on the promise of improved lifestyles – western lifestyles – for their subjects. So much for the claimed advantages of China’s system of government.

Will the huge debt Governments around the globe are taking on solve the problem?

The mess was caused by banks and finance companies, backed by hedge funds etc, lending money to consumers or indirectly giving money to companies to make things for consumers, who couldn’t possibly hope to pay it all back. 

Governments are now proposing that they will print more money, and give it to these same businesses so they can start leading again to the same consumers. If it was unsustainable for businesses, how with the Government solution be any difference?

The debt Governments are piling up will have to be paid for at some point, and the only way to do this is from taxes, you can’t indefinitely raise money through printing money and issuing bonds (debt). 

To me it seems like Governments are creating debt so they can give money to businesses so they can offer the finance to consumers so they can get themselves back into debt so we can return to the situation we were in a year ago. Everyone living beyond their means.

Governments that were so careful to live within their means, are now getting themselves into the same position consumers are in, living beyond their means. Governments are funded through taxation, and those taxes are created by consumers. So now Government has been sucked back into the debt cycle and is directly involved in enabling an unsustainable situation to continue a bit longer.

The pain will have to come at some point, we can’t go on living on debt.

Something has to change, and it may mean completely overhauling the way our society works and our governments are funded. 

Clearly the current model doesn’t work, and all governments are currently doing is trying to throw more money into the pot in the hope this will keep voters happy. Politicians aren’t really trying to solve the problem, they are saving their own arses.

Maybe Roger Douglas has a point. We really do need to re look at how things are done. The idea has been suggested before, it’s not old, because it has never been tried. If the situation is as bad a everyone says it is, maybe we really have to try something different.

Does Key really have vision or is he really just pandering to voters in order to sustain his own position. What will happen if all this money being thrown into the debt cycle doesn’t help?

Douglas is suggesting a completely new tax plan. This does something positive for low income earners, dropping the tax on low incomes altogether, and will make high income earners fact the true costs of ‘life’ which would put a dent into unsustainable borrow and spend lifestyle expectations.

The economy needs a jump start, but borrowing money to do this is just going to the same track that caused the problem in the first place.

Consumers/voters/politicians need to get real. The situation we are in is unsustainable, borrowing needs to be repaid, you can’t have a lifestyle you can’t afford and borrowing to do so just transfers the costs of the borrowing into the future.

The endless cycle of debt we all base our lives on needs to end at some point. We can either decide to do something about it now and make the changes now, or pretend that every-things OK and pay the higher price later on when the consequences could be dire.

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    • Jan
    • February 12th, 2009

    I think that current policy of borrowing to spend will need to rely on inflation to re-pay the debt, if future generations are not to be crippled, as I guess no government will face up to telling people they will have to work harder and export more!

    Roger Douglas’ plan is interesting and would certainly benefit from informed discussion. It would be sad if he is treated as Cassandra; to be right but never to be believed. After all his previous policies must have worked as they have not been changed even though no political party has had the guts to acknowledge it.

    Perhaps we have reached the time when the right to raise taxes, like the right to set interest rates, is taken away from politicians and that the elected party is given a certain amount of money to use. If their policies work they will get re-elected. Parties would then have to consider improving economic output rather than just finding another way of squeezing the tax-payer. A bit like teaching children sensible economic rules through the issue of pocket-money with a list of expenses that need to be met out of it.

    I am not blaming current politicians for the mess (well not too much!) as in a democracy we end up with what we wanted even if it is not what we needed.

    • Actually
    • February 14th, 2009

    Speaking of increased e spending, one of the worst is companies I have come across is CONTACT ENERGY!!! They have the worst customer service skills. ANYTHING YOU SAY THEY TAKE PERSONALLY AND I CAN”TED BELIEVE THE TEAMLEADER FRED! HE IS SOOO INAPPRORIATE RUDE AND UNPROFFESSIONAL
    All they want is for you to bow down to them, i really dont think they have the appropriate training for there staff. Fred appears to have personal problems which he is off laying to his customers. He does not listen, and puts blame onto customers???? He said its your fault… I mean where did he train?? out of a weetbix carton? He also bad mouths customers to others saying they are rude? when all customers do is ask him to please just listen to me fred he says nonono and keeps talking over us.
    I have had enough and am taking this even further!
    Contact energy has the most horrid way of treating customers, they are under qualifyed, rude and have problems of there own! If they they think they can get rid of us they are wrong, I will stand up for myself, and not allow them to bully me anymore!
    They shoukd not be in bussiness anymore, mecury energy is doing fine!

    • I think this one would be better on my post about Genesis and the crap way they run their company… feel free to repost this there 😉

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