Spend or Save? Consumer Debt's Impact on the Economy

We are in a catch 22, in a sense. So the government keeps saying that consumer spending is everything, and they're right. It's 70% of our economy! When consumer spending is up, everyone is happy and they talk about economic turnaround and stabilization. HOWEVER, this is not exactly good for the long run.

Remember, we got into this financial mess to begin with because money was so easy to get, and not to just invest, but mostly for average Joes to go out and spend more on their credit cards buying stuff; not investing in their futures. So we have this heightened level of spending that has been building since the early 1980s that we are still trying to build on. Yes, we need to make sure we are still spending on the consumer level and we want more countries, like China, to become more consumer spending oriented because that will help us out over the long run too. However, if the savings rate does not go up and stay stabilized, it will hurt us in the long term because then we will have the issues we have to deal with big time down the road, such as health care and Social Security. 

Saving is tough on the current economy as it doesn't show growth as easily, but trust me, the government is spending enough to keep this economy going, so saving is very key. It is much better for the long run as it promotes better businesses and stability down the road so we don't get into these highly leveraged situations later on.

If you look historicaly, consumer debt as a percentage of GDP since 1947 has averaged 12.75% (according to http://www.economagic.com/). As of Dec 31, 2010, that number is now 16.17% and that is after dropping from 18% in early 2008. As we can see, our consumer debt levels, which help consumer spending obviously, have been well above average for quite some time. In fact, the last time we were in the 12% range was back in 1993-1994. 

Back in the 1970s and 1980s, the national savings rate was around 6% to 7%.  We are almost back up to those levels now, but we still have to unleverage from the days of 0-1% savings in the 1990s and early 2000s.

Bottom line is that yes, we want consumers to spend to keep the economy going, but just like you would personally, you don't spend everything because you want to make sure you have enough money saved up for the rainy days and for paying your mortgages and other debt obligations later on in life.