Not too surprisingly, since the poll is being held on an advertising website, the response is running heavily in favor of “yes”.  But even if it weren’t, I think that would be the general mood.  Every talking head, most everyone you meet, thinks the economy is going into in the tank, and thinks that it is going into in the tank because the consumer is not spending enough money.

Part of that is true.  Part of it is not.  Let’s use an analogy.

My sister runs half-marathons.  Or, at least, she ran a half-marathon last month, so for me, that means she runs them.  She can run a long, long time, but she cannot run forever.  Eventually, she has to stop.  Now, I guess it’s true that she doesn’t HAVE to stop, at least not right there at the finish line.  She could keep running for a bit.  But sooner rather than later she’ll find that she’s running on borrowed reserves, that she needs to re-tool and rest and get food back in her, or she really will have to stop altogether.

TADAAAAA!  Same thing is happening here.  For a long time, the economy has been running on credit, that is, people are spending money they don’t have yet, hoping that the future will bring sufficient funds to pay back what they are spending now.  Now, if you are the only one doing that, it’s a problem but not a desperate one.  When everyone does it, however, there’s potential for a catastrophe.  Essentially, much of what everyone has been paid over the last thirty years was borrowed.  Now the bill is due, or, more accurately, the bills have been mounting steadily and they have now reached the point where the bill is larger than the income.

What smart people do when this happens is they look at the bills they have to pay, and they start cutting.  Nordstrom becomes Nordstrom Rack becomes Ross becomes Deseret Industries.  Market Street Grill becomes Outback becomes McDonalds, becomes “ah, I’ll have a piece of toast and go to bed”.  Vacation in France becomes the Grand Canyon becomes two days skiing becomes a Netflix disk of 24, the Second Season.  Etc.  Driving gets reduced, spending slows, people get defensive.  Now, I’ve written a lot about saving and what I call Financial Defense, and obviously really smart people play defense all the time, not just when things get tough.  But when times do, everyone starts playing defense.  This is terrible news for big chunks of the economy.

If you’re in luxury items, you’re in trouble.  You might survive (there are good ways to do that, but that’s not for this post), but you’re going to have to watch it.  If your business model depends on people paying $7 for a scoop of ice cream, you might have difficulties coming.  If you depend on true, non-food luxury sales, like for instance high-end art, you’re dead.  You will, absolutely, have to change what you sell, at least for a while.  In every recession, there are dead bodies, and if you think most of the dead bodies are going to be on Wall Street, you’re nuts.  Most of them will be on your street.  Businesses will have lower revenue, which means they have to cut something, and that something is you.

Less money coming in means you have less to spend.  It’s a very tight circle.  This is the cycle we’re in right now.  There is a way out, but it is NOT the way out that is currently being considered on Ad Age, or, in fact, anywhere else that I can find.  The solution to the decline in consumer spending is NOT throwing hundreds of billions of dollars at people in the hope that they will spend it (Stimulus I).  It is NOT throwing hundreds of billions at banks, hoping they will lend it (Stimulus II) - because PEOPLE DON’T NEED TO BORROW MORE MONEY RIGHT NOW.

What they need to do is LESS borrowing and more retirement of debt.  They need to get out of debt altogether.  Believe me, if the lending in the US vanished, and the debt in the US went with it, spending would skyrocket.  Who doesn’t want to spend money once they have no debt to worry about?  Seriously now, if you were in a position where you had no debt at all, no house payment, no car payment, no debt payments at all, how fancy would you eat out?  How many more movies would you see?  I you’re like most households, elimination of your debt would close to octuple (that’s 8x) your spendable cash.  Forget shopping sales.  You could go to any store, any time, and buy whatever you wanted (within reason).  Retirement saving becomes really, really easy if you don’t owe anything but the light bill and property tax.  Every part of the economy would benefit, and would do so in a sustainable way - to go back to our analogy, my sister would then be able to run forever, faster and faster.  No breaks.  Endless energy.

THAT is how we get out of the trouble we’re in.  Unfortunately, to do that we need two things we haven’t got - discipline, and patience.  So it isn’t going to happen.  What we’re going to get instead (on the macro level) is a fellow coming to the end of the marathon with a cattle prod and goosing the runners to keep going long past the point where they have strength.  What we’re going to get is people running past the finish line as if they have unlimited strength, and can borrow forever.  Both of these things lead to disaster.

So whatever others do, don’t you be stupid.  Refuse to be goosed.  Save your money, and save faster by getting rid of your debt. All of it.  Yes, even your mortgage.  Just say no.  Cut.  Save.  Whatever happens in the general economy, you be smart.