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October 15, 2008



Dave, while it is true that our economy (I'm assuming by economy you mean GDP) is primarily made up of consumption, it’s not necessarily true that a decline in consumption will slow down the economy. This is especially true when the decrease in consumption comes because people are saving more.

Macroeconomists teach us that the economy (GDP) is made up of four components: consumption, investment, government spending, and net exports. Any increase in one component will cause GDP to increase and vice versa. If consumption decreases, GDP will go down; however, if the decrease in consumption happens because people are saving more, then its not a given GDP will decrease. The saved money means more funds are available for investment, and an increase in investment will cause GDP to increase.

In reality, the whole thing gets complicated because the U.S. is an open economy and runs a trade deficit which affects net exports, and in turn affects investment. I guess what I’m saying is it’s not as simple as saying, “Save more, the economy slows, save less the economy prospers.” This statement can be taken to mean that if we want the economy to boom, then we should all spend, spend, spend. And that is not a good economic policy.


It seems we are in a catch 22. I would agree that consumerism has gotten out of control, driven by the constant marketing and electronics/digital revolution (everyone and his child has a cellphone!). On the other hand, 2/3rds of the economy is driven by the consumer. Save more, the economy slows, save less the economy prospers. How do you find the balance? Throw in the wrinkle of the current credit crisis, and the complexity is magnified. Forced cutbacks won't do it right. We don't have a war that people want to sacrifice for, we don't have the leadership in Washington yet, and we don't even know where we should be going - does anyone?

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