When people spend money the economy grows. But when the economy stops growing most stop spending for fear that they may have nothing left if times worsen.

When money is plentiful, both individuals and corporations spend. High levels of spending by people means increased demand for goods and services, greater production by businesses and the government and a booming economy. Everybody is happy, everybody stands to gain. Companies and businesses make greater sales and hence more profits, individuals buy things they want, and still have money left over to invest – be it in real estate or gold or the stock market. Everything is great and the economy shows growth.

When money becomes scarce, people get scared

However, the scene changes dramatically when money gets tight – as it is these days. When money becomes scarce businesses spend less, invest less, pay their creditors less in fear of worse days.. Individuals feel insecure and uncertain of the future. They worry about whether they will be able to pay off the loan they took 2 years ago to buy a new flat, or whether they can afford to pay for their son’s extra music lessons or whether they can still afford to put money aside for their daughter’s higher studies.

They start cutting down their expenses – a little bit here and a little bit there. They decrease their spending on holidays – maybe they stop going anywhere for the holidays. They eat out less often, do not go to the movie theatres so often, spend less on “luxuries”, and generally restrict their spending to the basic necessities. They are driven by fear that spending more now will mean even less money in the future and hence greater problems to deal with. While it is not a bad thing when individuals spend less on frivolities, less money in hand also means lower savings and lower investments.

If we don’t have money we are pretty much helpless

Money is important for all of us. We need it for our daily needs – for food, house, education for our children, for medical purposes, for travel and holidays, for investment and for savings. Everything we do, everything we need, has to be paid for in some way or the other and money is the big ticket for all these. If we don’t have money we are pretty much helpless, unable to proceed very far – whatever our station in life.

Just as we, as individuals, need money, so do businesses and corporate houses and the government. The government needs it for building infrastructure like roads and railways, for defence purposes, for agricultural support, for educational institutions, for connectivity and communication, for rural and industrial development and for a host of other things. Corporations and businesses need money to manufacture and provide goods and services, to sell finished goods and to buy raw materials and so on and so forth.

When individuals spend less and save less

When individuals spend less and save less, businesses and corporations also suffer – there is lower demand for their goods and services, so lower sales and lower profits. When individual investments go down, there is less available financial resources for business, corporations and the government. This in turn decreases their ability to invest, build, expand or grow. Hence they are caught in a situation where they can neither grow business nor pay higher dividends to shareholders or higher salaries to their employees – which again translates to less money in the hands of people and thus even less spending. It becomes a vicious downward spiral and attacks the growth of the economy itself.

Unfortunately, there is little to be done in such a scenario except for the government to step in and set counter measures in place. But that is another story……..