Economics 101

Admittedly, much of the information you learned in economics 101 is esoteric, irrelevant, and almost irresistibly forgettable. You probably studied supply and demand curves until your eyes glazed over, leaving you wondering if any of the material you were so diligently memorizing would ever prove useful. Surprisingly, many of the basic principles imparted by your econ 101 professor have very real and very powerful applications to your life today, particularly with regard to debt and debt consolidation. Read on for an overview of the economic principles that matter most to the world of consumer finance.

Consumer Behavior in a Recession

Almost every econ 101 professor asks his/her class the trick questions about what consumers should do in the event of a recession. Should they tighten their belts, stop spending, and save in preparation for economic hard times? Or should they spend even more in the face of an economic downturn? Although tightening your belt seems like the most logical behavior in the face of a recession, it’s actually the worst thing you can do for the economy. A struggling economy desperately needs consumer spending in order to recover and thrive. When consumers decide to cut back because of recession fears, they unwittingly deepen the recession, making it more difficult for the economy to recover.

Debt in a Recession: Good or Bad?

Americans tend to have a knee-jerk negative reaction to the prospect of debt, whether it’s their own credit card debt or the national deficit the federal government is so adept at running up. Of course, avoiding debt is usually an admirable and worthwhile goal, but economics 101 teaches us that debt is actually a positive thing in certain economic situations. In fact, during a recession, debt can be an economy’s saving grace. This principle is based on Keynesian economics, or the idea that the government should spend heavily during economic downturns in order to maintain the demand for goods and services. In other words, the government continues to stimulate the economy by spending and accruing debt until fearful consumers regain the courage to spend again.

Interest Rates

One of the government’s many tools to correct economic imbalances is the adjustment of interest rates. The Fed raises and lowers interest rates in order to control inflation and guide consumer spending. When the Fed wants to encourage consumers to save, it raises interest rates to make the endeavor worthwhile. When the Fed wants consumers to spend, it lowers interest rates, thereby making it easy to borrow money but less worthwhile to save. Currently, interest rates are at one of the lowest points in history, which can powerfully influence your decision to consolidate. Debt consolidation is a wise idea regardless of what interest rates are doing, but it is a particularly smart decision when interest rates are low. If you can take advantage of the interest rate climate to secure a low-interest debt consolidation loan, you will cut your interest expenses and lock in that rate for the life of the loan. And you thought economics 101 would never help you!

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