The Paradox Of Savings
02-27-2009, 01:30 PM
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The Paradox Of Savings
Now I'm getting a little confused. Am I supposed to save or spend? All my life, I hear people telling me to save, and now they are telling me to spend. How can I save what I have already spent? And I just opened a 15 month Certificate of Deposit that pays an awesome 
APY of 4.25%. If the bank uses my money to lend to others so they can spend, does this mean I am spending as well? Am I saving? Does anybody know what I am doing?? 
APY of 4.25%. If the bank uses my money to lend to others so they can spend, does this mean I am spending as well? Am I saving? Does anybody know what I am doing??
From Consumer Warning Network:
The economy is in the toilet, unemployment is going through the roof, housing prices are plummeting, and we are in one of the worst recessions in our nation’s history. So what do the economic gurus say we are supposed to do to get us out of this mess — SPEND.
But wasn’t it the spending that got us into this mess? Yes, our savings rate went from 9% in the 1960’s to a negative .6% savings rate in 2006. In 2006, we as a nation actually spent more than we made. In simple terms, we, as a nation, were spending way beyond our means.
Now, we are scared, so people are saving again. In November 2008, we saved $229 billion dollars for a 2.9% savings rate. In December 2008, we saved $378 billion dollars for a 3.6% savings rate. January 2009 figures are due out March 2nd and are expected to show even greater savings.
This is the “Paradox of Savings.” We save when we should spend and spend when we should save. Japan went through this in the 1990’s. They saved when their economy went into a recession. Unfortunately, once their economy rebounded they continued to save. The result is their economy is still in a recession and is now getting worse.
In 1957, our economy was in recession. President Eisenhower went on television and pleaded with the American people to go out and buy a car. Yes, just like today, the automobile industry was in trouble in 1957. President Eisenhower resisted tax cuts and government spending, but pleaded for more consumer spending. Although this was the correct message, it did not work. President Kennedy, on the other hand, lowered taxes, and stepped up military and space exploration spending, and the economy recovered. In other words, the government started spending more.
This seems counter intuitive but to pull our economy out of this tail spin, we need to look back at history and follow the advice of President Eisenhower and President Kennedy. Both the government and we, as a nation, need to spend more right now and save a little less. It seems crazy, but to avoid the “Paradox of Savings” we need to act counter intuitively.
The economy is in the toilet, unemployment is going through the roof, housing prices are plummeting, and we are in one of the worst recessions in our nation’s history. So what do the economic gurus say we are supposed to do to get us out of this mess — SPEND.
But wasn’t it the spending that got us into this mess? Yes, our savings rate went from 9% in the 1960’s to a negative .6% savings rate in 2006. In 2006, we as a nation actually spent more than we made. In simple terms, we, as a nation, were spending way beyond our means.
Now, we are scared, so people are saving again. In November 2008, we saved $229 billion dollars for a 2.9% savings rate. In December 2008, we saved $378 billion dollars for a 3.6% savings rate. January 2009 figures are due out March 2nd and are expected to show even greater savings.
This is the “Paradox of Savings.” We save when we should spend and spend when we should save. Japan went through this in the 1990’s. They saved when their economy went into a recession. Unfortunately, once their economy rebounded they continued to save. The result is their economy is still in a recession and is now getting worse.
In 1957, our economy was in recession. President Eisenhower went on television and pleaded with the American people to go out and buy a car. Yes, just like today, the automobile industry was in trouble in 1957. President Eisenhower resisted tax cuts and government spending, but pleaded for more consumer spending. Although this was the correct message, it did not work. President Kennedy, on the other hand, lowered taxes, and stepped up military and space exploration spending, and the economy recovered. In other words, the government started spending more.
This seems counter intuitive but to pull our economy out of this tail spin, we need to look back at history and follow the advice of President Eisenhower and President Kennedy. Both the government and we, as a nation, need to spend more right now and save a little less. It seems crazy, but to avoid the “Paradox of Savings” we need to act counter intuitively.
02-27-2009, 03:53 PM
#2
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Posts: 105
I'm really doubtful that individuals’ decisions to either spend or save are having much impact on the length or magnitude of the recession. First, I wonder how much of the increased savings rate is actually the result of decreases in GDP (and therefore income).
Second, most of the reduced spending is not the result of everyone’s decision to take a dollar earned, and save it rather than spend it. Most of it is due to reduced spending that is forced due to the now limited availability of credit. In other words, every dollar not spent is not necessarily the result of a dollar saved.
John Maynard Keynes I don't think could have imagined 100 loan-to-value mortgages, 14-digit national debt, CDOs and loan securitization.
Your comment regarding savings driving spending if the bank lends your deposit to someone so he can spend has long been the primary argument against the paradox of thrift theory.
Second, most of the reduced spending is not the result of everyone’s decision to take a dollar earned, and save it rather than spend it. Most of it is due to reduced spending that is forced due to the now limited availability of credit. In other words, every dollar not spent is not necessarily the result of a dollar saved.
John Maynard Keynes I don't think could have imagined 100 loan-to-value mortgages, 14-digit national debt, CDOs and loan securitization.
Your comment regarding savings driving spending if the bank lends your deposit to someone so he can spend has long been the primary argument against the paradox of thrift theory.
Last edited by RXS676; 02-27-2009 at 04:05 PM.
02-27-2009, 05:42 PM
#3
Gets Weekends Off
Joined APC: Feb 2007
Position: Left
Posts: 393
Now I'm getting a little confused. Am I supposed to save or spend? All my life, I hear people telling me to save, and now they are telling me to spend. How can I save what I have already spent? And I just opened a 15 month Certificate of Deposit that pays an awesome APY of 4.25%. If the bank uses my money to lend to others so they can spend, does this mean I am spending as well? Am I saving? Does anybody know what I am doing??
APY of 4.25%. If the bank uses my money to lend to others so they can spend, does this mean I am spending as well? Am I saving? Does anybody know what I am doing??
02-27-2009, 06:47 PM
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Gets Weekends Off
Joined APC: Jun 2008
Position: USAF
Posts: 1,398
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