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DanielleR

November 11, 2007

Posted by DanielleR

Effects of lower consumer holiday spending?

I've heard several financial analysts predict that recent subprime lending problems and rising credit card debt will lead to severely reduced consumer spending around the holidays. What are the short- and long-term effects of this reduced spending for our economy?

Comments

  1. jeffpard: I was at the mall today in southern California. The mall was packed. I was seeing large consumer spending. Why would spending go down if consumers can keep charging on their credit cards?
  2. DanielleR: Most analysts seem to be predicting that rising credit card debt will make consumers reluctant to spend money since oftentimes that only adds to their debt. However, perhaps your right - maybe consumers will just keep on spending!

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Chivy

November 16, 2007

Posted by Chivy

4 stars ( 2 ratings )

It is exactly what they said. Credit cards and any kind of debt is a way of substituting future consumption for present consumption. That means, if you get into debts to buy more things today you will be able to buy less tomorrow. Besides there´s the time cost of money because of interest (that is a dollar today is not the same as a dollar tomorrow). So in the short term there´s an increase of consumption an income in the economy, which is good; but the long term effects are stronger. As a result of consumption increase, there will be a savings and investments decrease, which affects long term effects. In the future, people will have less money to buy things but also to invest and save, so the gross product will decline (and that´s when the economy is affected)

Comments

  1. Chivy: sorry, in the middle of the paragraph i meant consumption AND income, not consumption an income
  2. DanielleR: Great explanation - thanks!

    Do you think this holiday season will have a severe effect on the economy?
  3. Chivy: I´m glad it was helpful.
    I actually live in Uruguay so I know little about what´s happening there, but according to what I have heard and seen, there may be a recession but there is too much to consider before you know how severe it will be. It depends on government measures, markets behavior, and how long people takes to find out that debt might not be sustainable in the long term

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