I hope everyone had a good Thanksgiving.  Today is Black Friday.  Today is the day that shoppers go to the stores looking for good deals.  Today is the day that businesses are supposed to do well and go into the “black” (profitable).  Today is also a good day to go over some basic economics.

First, there is nothing wrong with shoppers hitting the stores for good deals.  If people want to deprive themselves of sleep and get up at 4:00 in the morning to save a few bucks, then that is their choice.  If businesses want to sell some of their products for low prices to bring customers to their store, then that is fine too.

There is one economic fallacy that does need to be addressed though.  Spending is not good for the economy as is normally thought.  There is nothing wrong with spending, but consumption does not mean that there is growth and production in the economy.

There is somewhat of a correlation between consumption and production.  But we have to understand cause and effect.  Consumption does not drive an economy.  Consumption does not make an economy good.  Production is what is good for the economy.  Production is what allows consumption to take place.  You can only consumer what is first produced.  Even if something is consumed on credit, somebody else had to have produced something.

In a poor country, like Ethiopia, there is not a lot of consumption compared to the U.S.  Most people living in Ethiopia do not have big screen televisions and luxurious cars.  I’m sure most of the people there would love to have these things, but it is not possible right now given that production is extremely low as compared to other places.  In the U.S. a lot of people can afford to buy big screen televisions because of the large amounts of capital and investment that have given us the technology and the wealth to have things.

With all of that said, consumption by itself does not mean an economy is strong and growing.  I could use my life savings and take a luxurious vacation for the next two months that would make me look like a Hollywood celebrity.  But it doesn’t mean I’m all of a sudden really rich.  I would just be consuming past savings in a huge way.  I would eventually have to go back to work and drastically reduce my standard of living.  In the same way, it doesn’t necessarily mean anything if Americans go out and spend big for this Christmas.  Maybe their confidence is up, but there is no way to know for sure if production and technology have increased that much or if Americans are simply consuming more than they probably should.

The lesson in this is that you shouldn’t pay too much attention to the news.  Even if Black Friday is a huge “success” and people are spending like crazy, this is not necessarily good.  It might mean that consumers are going into too much debt and that low interest rates have enticed people to spend more than they should and save less.  Whatever you do, don’t base your long-term investments on the results of Black Friday.