To save, or not to save. That used to be the question.
But given the prospects of a recession, some are debating a different question: to spend, or not to spend. Because more spending is better for the economy.
The problem is that the average Canadian household has been gradually spending more and saving less. The Vanier Institute of the Family research reveals that the ratio of debt to income has been steadily increasing for the past 20 years, to 150 per cent from 93 per cent. The savings-to-income ratio had the opposite trend, decreasing to 4.2 per cent from 13 per cent.
Some might suggest the sole reason for that is because the necessities in life have increased in cost. And while it’s true that housing costs more, food and gas are on the rise and incomes don’t seem to be rising as quickly, that’s only part of the story.
Lower interest rates have made it cheaper to borrow and less rewarding to save. And that’s only given consumers more rope with which to ultimately hang themselves if something goes wrong. Maybe they lose their jobs. Or maybe debt payments increase with interest rate hikes, leaving even less money to spend.
But not all spending is bad spending. We need people to spend to generate sales for businesses. If these companies don’t have sales, they could lay off workers, which means even lower sales, which could lead to more lay offs and so on and so on.
Ironically, some argue that too much savings is bad. The Paradox of Thrift is that a higher average savings rate leads to lower overall savings. This is because higher savings means lower spending, which means job-growth is curtailed. Those potentially new workers could be saving part of their incomes too, but since they don’t exist, the savings don’t exist either.
So do you spend to do your part for the economy? Or do you rein it in to save yourself?
If the trends continue, eventually we’ll get to a point where we can’t spend any more at all. A rising debt-to-income ratio means we are spending future income today. That can only go on so long before a rude awakening. Just ask the U.S. government.
So perhaps the question should be rephrased: to save yourself, or not to save yourself? I think it then becomes more apparent.
The best thing you can do is to save yourself. If you run out of the ability to spend one day, that is worse for the economy than being able to spend a little for a long, long time.
Preet Banerjee, BSc, FMA, DMS, FCSI is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjeeReport Typo/Error