How Cutting Down Spending Prolongs a Crisis

Whenever times get tough and the financial stability of a state is threatened, people tend to panic. And panic leads to a complete block in the long run, because of the mentality that ensues due to the panic.

By panicking people cut down hard on their spending. And that happens not only to households, but also to companies and firms alike. The similarity probably derives from the fact that people run all of them, so a collective hysteria is a good bet. Anyway, only a few of the players on the market realize that cutting down on spending is perhaps one of the worst methods to fight an economical crisis.

In the global economy that currently blesses us all, trades and the continuous circulation of money is what keeps the world go round. That is why dropping a pin in India will reverberate the next day in USA and vice versa. Cause and effect have a much wider area of coverage now then it did fifty years ago. Outsourcing, transplanting and import/export is the new market bible out there. Also that is the reason why a US-generated crisis rocked the entire world. So it may seem a bit easier to understand why in a money-powered environment stopping the money from going in is not such a good idea. States work on one reason alone: the flow of cash. It comes in, it goes out, the entire flux has the purpose of keeping things going.

When taxpayers panic they tend to limit their spending to the bare necessities. In which case a lot of companies that provide services or good that are outside the safe area will most likely go bankrupt. That means an increase of the unemployment rate plus a decrease of income tax to the state. Meaning the state gets less money and has to pay more to the unemployed. Not the idea of a good deal. Consequentially, investors tend to decline to participate in a crippled economy. They know the buyer is reluctant to pop out the money, so he refrains from making an entrance on a hostile market. That means less job opportunities and less income tax.

Last but not least, in an effort to get more cash while spending less, even local companies outsource their production. Meaning they make their product elsewhere, in a country where they pay a lot less to the employees, in order to be able to sell the product cheaper and at the same time make more money. But outsourcing means another loss to the job department, because former employees will remain jobless in favor of the new 'exotic' ones.

So cutting down on spending is not a good idea. The more you sit on your cash doing nothing with it the less value it will have. And that proportion grows by day. Because that's what money does. By itself, it has no power; it's just a bunch of papers with some personality printed on them. Pump it in a system and suddenly the wheels start turning. By making money swim around you guarantee a clean exit out of whatever crisis may come.

at 12:44 AM
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