An Ecomonics Lesson

I never was good at economics. Though I ended up with an 80 in the course in university, it was mostly becaue our economics proof "knew what we were thinking" and gave us the benefit of the doubt when we wrote an answer.

Anyway, my understanding is that our economy (or any economy in general) does better the more people spend. It is the movement of existing currency which keeps our economy strong.

When everyone holds on to their money, in low interest savings, under their bed, or whatever savings plan you have then we have to make new money to inject into the economy. Theis creates a problem because more money means that it is "less rare". In theory, the value of an item is dependant upon how rare that item is, so the more money that is available and accessible the less it is worth.

At the extreme example, imagine everyone in the country held onto all the money they earned and never spent anything or gave anything away. Well, except for say the business you work at that payes you -- but then they get their money from customers which have stopped spending money - see the problem?

So, it's kind of ironic, because if we spend all our money we are broke, and have no financial plan for the future, but if we all save all our money the economy suddenly stops.

What this means is that financial health is about keeping a balanced ratio between what you save and what you spend. Not just for your own best interest but also for the economy as a whole.

And when we do save, we put our money into investments (RRSP, RESP, etc) These types of investments allow for our money to work for us. But also allow the money to be re-ciculated through out the economy which lessons the need for the goverment to print more money and devalue our dollar (or loonies for us Canadians eh?)

..But it gets even more interesting the more you think about it because the ratio of what we "save" compared to what we "spend" is dependant upon several external pressures pushed upon us.

Let's suppose the "so-called" financial experts tell us we are going into recession (or worse) depression. Such low periods in the economy are brought on by people saving more then then spend. Taking money out of their investments and putting them under their beds, because they are afraid they will lose it.

But this just starts a vicous circle, because if we hear recession our gut re-action is to get worried that we will loose our money so we stop spending, we take our money out of banks, and investements and now the economy gets WORSE..not better !! and then the finance experts project the problem is getting worse, so we re-act (incorrectly) yet again...and so on..and so on

Yet, if we did the exact opposite, if when we heard the word recession, we all went out and starting spending money, starting investing in funds while they are "on sale". The finanical experts would magically "project" upturn in the economy and the economy would actually do better.

So in short, we could say that the fear of a recession is creates a "sale" at a store. When things go on sale we buy more, not less.

Keep looking up !