It's Going To Take Good News, Confidence, and Spending

I do think the latest stimulus package does have some good points, but I don't think that it's going to do the trick.

In our series "This Has All Happened Before And It Will Happen Again" we discussed bubbles and crashes just like the one we are having right now. No better matter how bad it gets we always make a come back.

But once the bail outs and stimulus packages have run their course there is really three things that will get us going again: Good News, Confidence, and Spending. None of which we have right now. Namely spending.

We feel savings and limited debt are huge part of financial balance, but right now is not the time.

It's seems like yesterday when economists were telling us we had a negative savings rate.

The problem today is we are savings too much. If that is at all possible.

By historic measures are savings rate isn't that high. Even in comparison to other countries it's nothing to sneeze at. But it has been continuing to inch higher and right now we need spending rather than savings.

It's always best for us to save in the long run. But the economic toilet that we're being flushed down at the moment needs spending.

The Commerce Department calculated that in December our savings rate hit 3.6%, which accounts for $36 for every $1,000 after tax income.

That ads up to a lot of spending that isn't happening. Rather than an economy that is growing it is one that is really struggling.

With thousand of layoffs that seem to be happening daily people are scared. People are saving and paying off credit credit in fear that their job is the next to go. So until we have confidence again people will continue to live in fear rather than spend.

From the start of 2005 through April 2008 the savings rate was at a historic low of 0.5%. That began to turn around as it began to be clear we were in trouble.

The low savings rate at the beginning of the decade was due to consumers spending beyond their means for years said Keith Hembre, the chief economist for First American Funds.

And we were able to do that as long as the stock market and real estate prices were going up. These two cash cows allowed people to to turn their homes into bottomless ATM machines.

But once the stock and housing markets began to come down like a house of cards so did the spending.

As I discussed earlier man people agree with me that the savings rate is continuing to rise do to Americans worried they are going to lose their jobs. Others believe and I can agree with this too is people are trying to replenish their 401k's and retirement accounts since they have been beaten up by the horrific economy.

In addition to all this people are getting their credit cut off. With lenders tightening credit card standards and housing prices plunging people aren't able to tap their home equity credit lines. Many lines have been lowered or closed by banks.

The Federal Reserve has shown that consumer debt is coming down and consumer borrowing is coming down as well.

Don't get me wrong because savings is a great thing, but when everybody is doing it at the same time ad nobody is spending it's not good thing.

A high saving s rate is not always bad for the economy though. It depends on the circumstance. During the mid 1950's through the mid 1980's the savings rate was in a range of between 8% to 11%.

The savings at that time helped fuel the economy because those savings went to start businesses, which in turn was used to produce more products and hire more employees.

You might as well being putting your money in a mattress because with out spending things will not get better. The unemployment rate is at 7.6 percent, which mean 92.4% of the population is still working, which means people are still working. If you lifestyle hasn't been disturbed by the economy then get out there and spend like you normally would. It's one of the few ways we are ever going to get out of the hole.