Earn What You Spend

I’ve written before about the paradox of thrift we now face; we desperately need to reign in our debt-fueled consumption.  Not because there is something bad about consumption, but rather because we have been spending money we don’t have.  That is, plain and simple, unsustainable.  I noted a couple of months ago: 

Our financial system is teetering on the edge - each time we think we’ve pulled away, we watch while another bank requires massive government intervention to keep from going under.  The pullback in consumer spending has come at the worst possible time.

So what do we do next?  Continue to encourage consumer spending with the full knowledge that we simply cannot afford it, pushing the bound-to-happen pullback further into the future?  Or do we face the ramifications of this pullback, and finally put the consumer on a more sustainable trajectory? 

Now, with the economic crisis deepening, this is exactly what consumers are doing: 

U.S. consumers cut their spending during December and they increased savings in fear of a jobless rate that keeps rising in the deepening recession.

The saving rate jumped in May and has since then been at levels higher than the rates in recent years. People are squirreling away money as fears rise over layoffs.

And this was David Leonhardt’s exact point in yesterday’s New York Times magazine.

ONE GOOD WAY TO UNDERSTAND the current growth slowdown is to think of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We’re suffering from investment-deficit disorder. 

We will adjust to this new economic reality.  The only question is how painful this adjustment will be.