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.