Tuesday, February 03, 2009

Paradox of Thrift

Are you cutting back on spending? If you are one of the millions of people who have lost jobs, no doubt you have eliminated everything but the most essential things. What if you still have a job, are you still cutting back on spending? Here in this household, we have talked about how we can save more and spend less. We've always tried to live within our income and so saving some of our retirement income isn't foreign to us. Is the worst over? I don't think so.

I know I'm not the only blogger who feels that way. Gloria, Vive la Vida blog, recently wrote about her frugality at the grocery store. Some of my kids are expanding their vegetable garden.

The government recently reported that in the last three months of 2008 Americans' rate of saving rose to 2.9 percent compared to less than a year ago when we saved at a rate of less than 1 percent. Some economist think that the savings rate could rise to as high as 6 percent. Could it be that consumers could start to spend and save more like their Depression era grandparents? Sounds good to me. Walking around with high credit card debt and taking cash out of home equity was not living within your income.

But here's the thing, that gets us into this Paradox of Thrift. I'm not an economist so I'm not going to get into the technical stuff but you can read about John Maynard Keynes theory here. My simple way of putting it is that the less we spend, the less goods and services we use, the more people get laid off, the less goods and service we use........ But wait, there is another opposing view. If demand goes down, prices will fall until once again demand resumes which limits the cycle. And also, money that is saved becomes available to be loaned at lower interest rates and that stimulates the economy. Either way, things get pretty rocky until you reach an equilibrium.

My heart just breaks for the families I see on TV who are struggling and I'd like to throw something through the TV at the Wall Street Executives who tell us how they would lose their main people if they don't give them big bonuses. Oh, but of course, they are not paying them bonuses with OUR tax money. Yeah sure! These are the people who thought up all these hedge funds and schemes that brought their firms to their knees yet the corporation still wants to reward them. The Landscapist expresses his disgust about Wall Street strongly in a long rant and I pretty much agree with him although I couldn't write that post.

At any rate, inspite of Wall Street, The Paradox of Thrift theory, the burst bubble, the Recession, I'm a Depression era baby. I think it is better to work hard, live within your actual income and save. Be thrifty and save something, even if you are retired.

10 comments:

Steve Cotton said...

The increased saving rate is great news for the long run. However, if we enter a deflation cycle, savings will undoubtedly make the cycle very painful. We are not yet in danger of deflation. But it sits out there in allof its glory.

Billie said...

Steve, I'm not sure that some measure of deflation is avoidable. It is already happening with housing prices. Of course some areas of the USA had housing prices that were over-inflated to start with.

glorv1 said...

Billie, very nice of you to mention me in your post. We are trying to stay within our budget. I feel bad for the people that are not making it. The only thing I do so that I don't feel guilty is take a box of various dry food items at least twice a month to the senior center. It always feels great when I do that and I know they can use it. Have a great day tomorrow.

glorv1 said...

Billie, very nice of you to mention me in your post. We are trying to stay within our budget. I feel bad for the people that are not making it. The only thing I do so that I don't feel guilty is take a box of various dry food items at least twice a month to the senior center. It always feels great when I do that and I know they can use it. Have a great day tomorrow.

Calypso said...

Billie - We are spending money on materials and planning on doing some building here (in Mexico). The peso to dollar is simply to rosy to not get some materials and labor in before these things rise in cost - they will - just a bit slow to catch up here.

I am NOT buying a new 60" HD television however - we are thrifty folk.

Anonymous said...

good post. Same allover the world.
www.hephotos.blogspot.com

American Mommy in Mexico said...

"I think it is better to work hard, live within your actual income and save. Be thrifty and save something," - Wise Words.

Anonymous said...

Average executive pay in relation to average employee pay in 1980? 40X
Average executive pay in relation to average employee pay in 2007? 433X
Are our competition problems because of worker pay or greed at the top?

Oh wait! Wrong soap box. Sorry.

The problem is that if we want people to start saving we have to go form a comsumer driven economy to one that is based on production. For too long our government has been pushing the consumer driven model because it has been the easiest to accomplish in the short term, all consequences be damned. That being said... Calypso, saving is saving but a 60" HD???? YEAH BABY!


Son #3

Babs said...

I've always subscribed to the theory that "if you live beneath your means you'll never be in trouble" - so far so good.
I do know people who subscribe to the "live to the max every day and the heck with the future" - they are all in a panic now - literally.

American Mommy in Mexico said...

Can Son #3 say what his source is for the metrics? I so agree with him and would like to know where data resides!