Why the Economic Corpulence Package will not work

President Obama (and his supporters) said one of the ways his economic stimulus package will (eventually) succeed is by encouraging banks and other creditors to start lending again so people can go out and buy lots of stuff. All of this spending will "save or create" lots of jobs, all good ones and all here in the USA. Wait one minute here, what happened to more manna from heaven than we can shake a stick at?? Cures for cancer, heart disease, diabetes, obesity, hangnails, etc, etc?? Throw in the moon and stars while you're making pie in the sky promises.

Increasing credit liquidity (aka encouraging banks and other creditors to start lending at lower standards just to boost Gross Domestic Product) will not turn around the worldwide economic recession. The reason for this blog and the current economic crisis is the gross overextension of credit caused by subprime mortgage lending. In other words, lending money for extremely high ticket purchases, homes that the buyers were not expected to be able to repay in the long run, turned a nice normal all-American business cycle recession into a severe worldwide recession.

In 2005, the USA had a negative personal savings rate, the first time since the great depression. In 25 words or less, the USA spending exceeded its disposal income. (disposal income is money after taxes. Jiminy Cricket, talk about your endangered species!!) A return to the credit abuse habits that got the USA into this extreme recession will not get us out of it. We may see an increase in sales and gross domestic product on a short term basis, but another extreme recession will be just around the corner. IMHO, Americans don't need more cell phones with cameras, music, video and web surfing ability; we need to hunker down, tighten our belts and get our feet back under us. Put another way, start living within our means and saving money for long term wants and needs. College tuition, home purchase, retirement come to mind.

President Obama recently said he wanted the US government to do the same thing American families do with their money. Sit down, work out a budget so the family income will cover all necessary expenses and some savings for future items. This would be real, unprecedented change for the better. Now the decision must be made, do we continue to encourage a consumption based economy or start to encourage a savings based economy?