I bet you didn’t know that the famous economist, John Maynard Keynes’ actually suggested that saving money could harm the economy. He called it the ‘Paradox of Thrift” Why? Saved money is not spent money, and it is spent money that ‘oils’ the economic wheels. If money is withheld (saved) from an economy, demand for goods and services diminishes, this lessens output and therefore profits.
But wait, there’s some more. The reduced productivity will cause incomes to drop, which then sends the economy into a downward spiral as a result. Have you got all that?
Now Dr. Keynes didn’t postulate his theory based on an individual’s saving regime. Rather he recognised the issue as a consequence of the whole population doing it at the same time. It seems that we tend to start saving ‘en-masse’ at the worst possible time. As soon as we think the economy is starting to slow, we begin to pay down our debt and put money aside for the inevitable ‘rainy day’. Unfortunately, it is just this type of sensible preparedness that actually makes everything worse!
Strange isn’t it. Saving money has always been regarded as a good trait and is encouraged by just about everyone. Yet according to Keynes if we were all to adopt this “good trait” and stop spending, our economy would contract into recession and possibly depression.
So it really is a case of too much of a ‘good thing’ bringing us all undone. You might recall during the GFC in Australia, tax payers were given $900 to spend. This was the Government’s antidote to a wave of thrift hitting the economy.
Well, guess what, the recent national account figures show the Australian economy has grown by 1.1%, reversing the 0.5% decline from the previous three months to December 1. When GDP falls in
two successive quarters, the nation is considered to be in a recession, so it seems our spending has saved the day. (Note to wife – not just my spending)
This will now mean, that any arguments you have with your partner, about spending, can be quite easily settled by quoting Keynesian economic theory. Just inform them that your spending is actually a vital stimulus for strong economic growth. Give it a go, I’m sure it will work a treat! Okay back to browsing Amazon.
By the way, it is important to know the difference between saving and investing. Correct asset choice depends on it. Check out this post to show you what I mean.
