It’s been all over the news: Americans are saving money and paying down their debts. And that’s a bad thing.

New Federal Reserve data revealed that U.S. households paid down debt for the first time since the central bank started collecting the information in 1952. Consumers paid down a record $7.5 billion of debt in August 2008. In the recent past (as late as 2007), economists begged the American public to save more money and pay down debt. Be careful what you wish for, Mr. Economist. The experts are now seeing the effects of all their good advice – now that people are saving money, it means they aren’t out shopping; they are not creating a demand for goods and services.

These days, Americans don’t produce much: consumer spending accounts for 70% of gross domestic product (GDP). If Americans are funneling their money into paying down credit cards and into newly minted savings accounts and not buying things, companies don’t need workers to make or sell goods or provide services. If people lose jobs because no one is spending money, well, the unemployed aren’t generally known for spending sprees. With the unemployed adding to the ranks of Americans putting the breaks on spending, then there is less demand for goods and services, even less need for workers, more people are laid off…and the cycle spirals downward.

The bright spot in all this? Hopefully, when the housing market bottoms out (say, 20 years from now?) people will be debt free and have lots of cash on hand to buy homes they can afford. Yes, I’m being cynical.

A personal note: Maybe the economists are seeing good numbers in the amount of debt being paid down by, but here in my little corner of the world, I am having more and more people tell me about debt they are defaulting on. One guy early last week told me he had $500,000 in credit card debt (yes, you read that number right). That’s an extreme case, though. The usual amount these days in $50,000 in credit card debt. Of course, the economy was stimulated during those credit card purchases – ah, those days of yesteryear.

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