Please explain to me in simple terms the theory behind spending ourselves out of a recession?

[Countingthegreyhairs]

I know David Cameron has raised this subject today but I'm not trying to start a party political debate.

I just genuinely don't understand the theory behind the strategy. I can get my head around the fact that a country, which doesn't have a large national debt, can let some of those "spare" funds filter down to stimulate economic activity and bank lending.

But how is it supposed to work when the UK has a huge national debt?

I don't get it. Is it spending against future growth? Surely that cannot be a sound way to proceed?

I confess to having a very poor knowledge of economics - am I missing something here? Can someone please explain it to me in terms I will understand?

business' etc rae hvaing to close because people are not spending enough money in them which means more and more people are losing their jobs and will have problems paying back their debts which will cause the banks further trouble.

sooo if you spend more moeny there will be more jobs and more people will be able to pay back their debts

I'll be watching this thread with interest, because it sounds to me like the Govt are handing people who are already in a debt hole, a shovel and telling them to dig themselves in deeper.

But SeaShore - that's exactly what I don't get. If people are in debt then surely they shouldn't be encouraged to spend more?

Doesn't debt eventually have to be paid back?

I believe the policy goes something like this.

In countries like China and Australia, put money aside during the boom years and then spend the surplus during the bust years.

In the UK, spend like mad and acquire vast debt in the boom years, then borrow some more and spend further from your overdraft in the bust years. (of course GB oversaw the end of boom and bust ).

Let future generations pick up the pieces.

Yes, I think the problem is in the UK we only HAVE one style of economic system, and that relies on 'growth' and credit (read: debt). There is currently no other way whci is why, given the speed with which the house of cards came tumbling down, the govt. has no time (or inclination??) to find an 'alternative' economic system thus must send the one we're stuck with into overdrive.

I have always been suspicious of the the idea that an economy has to be based on 'growth' as surely anyone with an iota of common sense would see that the point would come where the bottom of that growth pile would become too expensive for 'the common man', almost like a pyramid scheme! The obvious example is the housing market. SURELY it was evident that a point would come where everyone who had the faintest chance of buying via 125% mortgages, '8 x income' house purchases, parental bail-outs - had done so thus if nothing was coming in at the bottom, the top would teeter- yet we all act so surprised!

I think the govt will come to rue the latest measures to 'save' the current economy- at best they are delaying the inevitable, at worst, deepening the recession. We will, as a nation, regain a semblance of equilibrium far sooner if this debacle is allowed to run its course. If you were mad enough to buy a house over the past 2 years, you wear the consequences. What we need is prudence and savings. What we're getting is absolution from responsibility, be it the banks or individuals who are financially incontinent.

Obviously if you are in personal debt, don't spend.

I think they are refering to people who are defering purchases they need/want, keeping money out of the economy.

For instance we are waiting until next year to purchase a laptop, we have the money now, but we want to see if prices come down, but govt is saying not to defer the purchase, as by that time, the computer store could be out of business and the now jobless employees will not have money to put into economy either.

If people stop spending, small businesses go bankrupt and large businesses make people redundant, which in turn leads to less people able to spend and less money in circulation. The problem is that when there is 24-hour news coverage about recession, people who don't need to worry (yet) stop spending. Like brownsugar said, if you haven't got it in the first place you shouldn't be spending.

A lot of us actually don't have it to spend anymore.

Because we have no job or we're spending it all to keep the heat on at a bare minimum.

The whole thing seems to be one massive experiment/gamble in UK economy management and you can either:-

a) believe it will work and spend like mad in the belief that you are securing your job and those of other people.

b) think it might work and spend as normal or slightly less in the hope of stabilising the business and jobs market.

c) consider it to be one hell of a massive experiment/gamble with the taxpayers' money and taxpayers' future money and batten down the financial hatches in case it doesn't work.

Adopt which ever strategy fits with your attitude to financial risk.

I feel for people in your position expat where it was hard before all this credit crunchiness, now it's almost impossible.

We are waiting until the new year to decide on some semi-necessary spending and a trip abroad for a very good friends wedding, as we know we have jobs until June, but after that, it's a bit unsure at the moment. We have definitely cut back on spending, and while it's not a dire situation for us, it has made me think about spending and being more budget conscious and making sure we get value for money.

oh, we're lucky, brown, because we have work.

but a lot of people don't and let's face it, fuel to heat the home is costly.

our local woolie's employed quite a few people.

they don't know what will happen to their jobs in the next few weeks and in a rural area, other full-time work is hard to source.

Thanks for your replies everyone.

Ladyworsley - why isn't the government forced to save over the boom years? Surely that is their responsibility? What has "prudent" Gordon Brown been doing for the past decade? Who is held accountable and why did the regulatory system fail so badly?

Basically what Gaussgirl says - why is NO ONE taking responsibility for this or is it (legitimately) possible to blame it on international events "beyond our control"?

BrownSugar and Basement Bear - thanks for your replies, I understand that if you are in debt then you shouldn't spend but even if one is not in apparent difficulty now, many of us have debt in the form of mortgages. Surely that is going to make us more cautious in the current climate? Anyone with a modicum of intelligence is surely going to cut back on the rest of their spending aren't they, whatever the government advises?

SitdownpleaseGeorge (love your name btw)
You've summed it up brilliantly. I think I'm between (b)- and (c).

I understand, as Xpat has pointed out, that for many people this is an academic argument as they are struggling anyway, so whatever the strategy the government take it is not going to help.

But I guess I'm interested in the theoretical possibility - if this strategy goes horribly long and you take the rollover of debt to its ultimate conclusion - whether the UK as an entirety could go bust?

meant to say - horribly "wrong"

the whole economy seems to be based on people spending money they don't really have

which seems like madness

no wonder it all went up in smoke

counting, it's up to the chancellor to save in the good times and ours didn't. Then again, he clearly didn't understand that we were in a boom which makes you wonder about his economic sense.

GB was just imcompetent as a chancellor, imo, with obvious mistakes such as selling off our gold at rock bottom prices and sneaky stealth taxes that ruined our private pensions industry.

I think our national debt is the second worst in the world next to the US, and yes I wouldn't be surprised if the UK were to go bankrupt in the future when we realise that someone actually has to pay for our public sector pensions (currently left off the national balance sheet) and with wealth generating small businesses going to the wall.

GB can blame the "global crisis" all he likes- we'd be in this mess regardless. Soon he'll be off to the IMF or the Arab countries with his begging bowl I expect.

And on a personal level, I would do the opposite of what he advises so if he says spend, save like mad (if you have anything left at the end of the month which we don't).

I'm not anti labour, btw. I voted them last time and quite like Ed Balls, but GB is just a disaster.

thanks Lady worsley and CatisSleepy

I couldn't agree more (partic. with regard to stealth taxes)!

That's a shocking figure about our national debt being second worst to US ....I didn't realise that

.. I wasn't an out and out fan of Thatcher (partic. of her social policies) but it makes you wonder what she would have done in similar circs ...

The idea comes from the 1930's economist JM Keynes.

I think the principle is to put more money in people's pockets so as to increase financial confidence. Then when people spend more it generates more business all the way down the line (e.g. you buy a pair of shoes: it boosts the retailer's books; they order more shoes from the manufacturer; the manufacturer orders more shoes from the designers and fabric suppliers, etc etc).

That's the way I understand it. However I am very suspicious of the suggestion that we get into yet more debt in order to finance this.

If we all stop spending our own money and the government stops spending public money then more and more jobs will go so there'll be less money to spend and it will all spiral downwards indefinately....

however, if those of us who still have jobs spend our money as normal (not more, just not less) and the government keeps spending money then we'll keep more business afloat and the downwards spiral wont be as dramatic.

now, the problem is that the government doesn't have any money to spend... BUT governments can borrow money at the most preferential rate of interest of anybody so if anybody is going to borrow it makes sense that it should be the government. Hence why the goverment should be the ones to 'spend out of the recession' with public spending.

If you want more info google 'john maynard keynes' he came up with the idea and it basically worked to save the US after the great depression.

The alternative to keynesian economics is the chicago school and milton freidman - he says goverments should cut spending entirely and no prices should be fixed and the market should be allowed to do wahtever happens - this does result in economic market success but also greatly increases the gap between rich and poor and forces the middle class into the poverty due to loss of jobs etc.

"why isn't the government forced to save over the boom years?"

Why indeed? Well they chose to increase spending on healthcare massively (fron memory over 100% in real terms) without any corresponding improvements in service delivery. They did the same with the schools. Then they entered into the odd war. S'easy to spend if you are in government - watching it all dribble away ...

They never got to grips with the financial services industry IMO. Never regulated it properly. Not lending, not pensions, not life assurance nothing.

Wikipedia is good on Keynes if you are really interested. It is less good on Friedman.

Wasn't teh Hoover Dam built to spend out of Depression.

In the States when they gave people income tax cuts, they did not spend, they saved. Hence why not done this time and teh fiscal stimulus is via VAT. This is the theory.

I sadly find it slightly exciting taht economic theory is being put into practice. Purely from a cold, cross our fingers and let's see if it works perspective.

Very difficult to apply any pure economic theory though since difficult to gauge reactions by public (currently in a state of high anxiety)

OK. Here's an example.

I am worried about what is to come - note, not what is happening.

So I stop spending as much money, even though (luckily and fortunately) I don't actually - yet - need to stop spending money.

Each week I spend less at the supermarket. So all the companies whose goods are on the shelves in the supermarket see fewer sales.

If they sell less, they make less money. If they make less money, their profits go down. As they have shareholders to answer to, they have to examine their costs, to make sure that they can be as efficient as possible, to make as much profit as they can.

If they're selling less, they don't need to make as much - which then means they probably have too many people involved making stuff.

So this then ends up in someone being made redundant.

At the same time as spending less at the supermarket, I may also decide to spend less elsewhere. Instead of going to the hairdressers every 6 weeks, I spin it out to every 8 weeks. This is fine for me, but obviously means less business for the hairdresser.

Or, instead of having my legs waxed every 3 months or so, I resort to using a home treatment which is a fraction of the cost. Obviously the company that makes this benefits, but the salon where I used to go no longer has my custom.

Therefore each time we choose not to spend, there is a potential consequence. In 'normal' circumstances this is fine, as there are always people spending more for all of those of us who might be spending less - for whatever reason. But in climates as we have now, when most of us are fearful (even if we are not directly/immediately affected), what we are seeing is a mass withdrawal of money from consumer markets, so that the impact on the economy is immense.

Which is why the government wants to encourage us to spend more money where we can.

HTH!

I don't think you can judge people's spending behaviour based on the month before christmas but......

People will still spend and actually they just spend differently in recessions and in unexpected ways.

People will always buy food and research shows we actually spend more on premium foods (your supermarket 'ooh aren't you special' readymeals etc.) in a recession as an alternative to going out - ie a treat on the cheap (yes I know logically the ingredients cost fourpence and blah blah blah, not saying I do it but people in general do).

But we cut back on going out etc.

But the current plans do have a veneer of 'suck it and see' - lower interest rates so no bugger wants to save, but instead injects his cash into the economy, meaning pensions are fucked but hey, we all get better shoes to go to the bankruptcy hearing in

Im being really thick here - but what is the worst that could happen? What if the country went bankrupt. If we have the second worst debt in the world that is awful. Surely that is a really bad position to be in. Anybody explain it to me simply????

anyone????????????? I am really worried about the state of our finances in this country and our children really really suffering in the future for it. Or am I worrying about nothing???????????