The paradox of thrift

http://biz.thestar.com.my/news/story.asp?file=/2009/2/28/business/3368323&sec=business


This article claims that the current recession has been especially bad for savers and that, it has been worse than previous ones. The article sums up some of the highlights of the current recession. It reports that the recession was brought on and made worse by people saving money. According to it, this in turn caused the value of investments to fall by about 50%. America, itself, lost $2.4 trillion during the first ten years of 2008 in mutual funds. Housing prices fell and unemployment rates rose worldwide. The articles states that it should be in the best interest of everyone to spend more money and stop saving. The government, itself, should spend more money to promote this. Highly industrialized countries such as Japan and Germany were among the countries that were hit hardest.



First of all, the article is in keeping with the paradox of thrift. It states that due to people saving more money, consumption rates decreased summoning the current recession. This lower consumption caused the aggregate demand curve to shift to the left resulting in a surplus. As businesses suffered from lower revenue and increased inventory they fired employees. This further decreased the sense of financial security in people, and consequently urged people to save more money. With more savings, the chain just continues to repeat itself. This article also relates to the aggregate demand and the recessionary gap. As the demand curve moves to the left from equilibrium, the recessionary gap widens and employment opportunities decrease. Finally, as a whole, the article can be summarized using the Keynesian economic theory, which states that it is necessary for the government to spend money to preserve demand for goods.



The current recession has taken a huge toll on the world economy and has left economists speculating everywhere. When we decide to save money we are reserving that money and taking it out of circulation. This increases the unemployment levels and decreases the amount of job opportunities available. It is a paradox and in order to get out of it, consumers must regain their confidence. While the government can help promote these by spending more money on increasing the demand of goods in the end, it is up to us to start consuming and stop saving. As individuals when we all are spending money, we are keeping the demand of goods up and indirectly investing on employment insurance. Keynes was once noted to have said that "Whenever you save five shillings, you put a man out of work for the day." In Canada the recession hasn't hit as hard yet, but if we start roosting on our money now fearing that we will lose our jobs, we actually probably will.