Is Consumer Spending the Lifeblood of the Economy?

by Dr. David Gruder

Conventional wisdom says that consumer spending is the lifeblood of an economy. This attitude is deeply engrained worldwide, but especially in first world countries, and most dramatically in the United States.

When was the last time you considered the implications of this deeply engrained assumption? Never? Well, you’re far from alone.

This blog post is a bit like the classic Emperor’s New Clothes story: we’re so used to our assumptions that we don’t think to question them. Well, let’s do a little questioning now, shall we?

Let’s suppose, for the sake of this particular blog post, that we accept this conventional wisdom (though  I might challenge this assumption in a future post).

If consumer spending is the lifeblood of the economy, what is the lifeblood of personal financial stability? It’s Financial Independence. What is Financial Independence? It is something our culture has trained us to expect from life: at some point in the future we will stop paying our bills through working. That point is conventionally called retirement. Financial Independence simply means paying your bills through sources of income that don’t directly have to do with working.

Part of the American Dream is that the combination of a Retirement Account and Social Security will be enough for us to pay our bills from the time we stop working until when we die (and hopefully also have money left over for our loved ones).

We and/or our employer therefore pay into Social Security on our behalf while we’re working so that, theoretically, when we reach retirement age we can receive our old age pension. Paying our Social Securty taxes today is essentially supposed to provide us with the government’s equivalent of a Retirement Account tomorrow.

Many companies also offer employees some sort of Retirement Account above and beyond Social Security. Some employees add into these accounts additional funds of their own and/or they open Individual Retirement Accounts (IRAs), in order to provide an extra cushion for retirement.

Relatively few individuals focus their financial planning around reaching Financial Independence before retirement age. But, far too few people focus their spending and saving decisions around reaching Financial Independence even at retirement age.

Think about the implications of this tension between spending and saving:

  1. Consumer spending is the lifeblood of the economy but consumer saving is the lifeblood of creating Financial Independence.
  2. Businesses do their best to get us to spend as much as possible. This means that the lifeblood of the economy is in direct opposition to creating as much Financial Independence as possible as rapidly as possible.
  3. Here is the bind: Without consumers spending, businesses don’t generate profits. If businesses aren’t profitable, they must let go of employees.
  4. Implication: We work in order to pay our bills and pay the government. We pay for goods and services so that business profits will increase which, in turn, is supposed to cause the investments in our retirement portfolio to grow, which theoretically means that the size of our Financial Independence nest egg will grow so large that we can stop working while continuing to live the lifestyle to which we became accustomed while we were working and spending.

The bottom line is that businesses don’t have the best interests of citizens at heart. This is not in any way a criticism: it is simply a fact. Why? Because a business’s job is to maximize their profits. How do they do this? By maximizing your spending.

There are only three funadamental ways for a business to make money:

  1. By selling to consumers
  2. By selling to other businesses
  3. By selling to the government

What is crucial for consumers to understand is that no matter which of these three customers a business is selling to, YOU and I are always the ones making the purchase.This is, of course, completely obvious when you’re buying directly from a business. But what about the two other ways businesses make money?

When a business sells their products or services to another business, that business — or the businesses that one sells to — are ultimately selling to two customers: consumers and/or government.

And when a business sells directly to the government, where is the government supposed to be getting the money from to pay that business for what it purchases? From citizens, that’s who. (Bear in mind that, as contrary to the U.S. Constitution is it is to treat a business as having the same rights as a person, the government nonetheless has been treating businesses in precisely this way since 1886. For details, click HERE.)

The most fundamental assumption underlying our economy, in terms of spending AND wealth building, is this:

  • The more we buy (consumerism), or the more businesses buy from other businesses and the government buys from businesses, the more profitable businesses become.
  • The more profitable businesses are, the more wealth that those who invest in those businesses make (Financial Indepenedence building).
  • When consumer spending goes down, businesess become less profitable. When companies are less profitable stock prices go down, employment goes down, and the amount of taxes the government collects from both businesses and workers therefore goes down (including for Social Security).
  • When stock prices go down, this type of core investment that is, directly or indirectly, a large part of most people’s retirement portfolios, loses value. When this happens, the amount of Financial Independence, and the speed by which most people can attain it, decreases.

So, the hidden message in our conventional wisdom about the engine that makes the economy work, is that best way for citizens to fund their retirement is to consume, consume, consume.

But, what happens if we do too much consuming (as our society ceaselessly encourages) and not enough saving? Well, if we do this, the economy will grow by leaps and bounds. But, as over-spenders, we will NOT be among those who reap the benefits of that growth because our over-the-top consumerism will have prevented us from buying the investments we need to accumulate in order to build our Financial Independence (that is, our retirement income).

With the Emperor’s New Clothes now stripped bare, doesn’t this kind of economic system strike you as just a wee bit odd?

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