The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

The Paradox of Thrift . . . huh?

08/04/2010

The good news is that consumers are now saving 6.4% of their after-tax income. The bad news is that consumers are saving 6.4% of their after-tax income!

Because most Americans have too much debt, it is good to see them saving more. It is good for them as individuals. However, consumer spending makes up about 67% of our GDP or national income. If they save more and spend less, our national income decreases. While increased saving is generally good for individuals, it is not good for the overall economy. Economists have long referred to this as the Paradox of Thrift.

Over the long-term, increased saving is generally good for the economy but not in the short-term.

Consumers in some nations, like China and Japan, save too much, depressing their national incomes. Their leaders are asking their people to spend more and save less. That is a luxury we do not have . . . darn it!

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