Wednesday, February 4, 2009

Spending vs. Savings

Consumer spending is critical for economic recovery.

There are conflicting views as to consumer spending. In Finland, the advertisements are stressing consumers to spend while in United States, bank advertisements stress savings with attractive CD rates. Why such a dichotomy in the world views of consumer spending vs. savings?

Case for savings:

1. Banks need to raise deposit levels
2. Banks can receive cheap funding with attractive CD rates
3. Banks can use the savings to lend money at higher rate
4. Savings is good for the over-leveraged consumer which has been living on borrowed money. So did the companies; banks included.
5. When money is saved in banks, money is not spent in the economy.

1. Case for spending
2. Money spent aids growth
3. Money spent supports employment
4. Money spent replenishes the coffers of state and local governments in terms of sales tax
5. Sales tax in turn helps governments to support government programs

While spending will do good for economy, savings will do good for consumers over leveraged personal balance sheet.

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