Saturday, May 2, 2009

Paradox of thrift


JM cautions Usall not to be recklessly conservative.

JM: In a recession, everyone becomes more cautious and starts saving more money.

Usall: But surely saving money is a Good Thing?

JM: In moderation. But carried to excess, it can be counterproductive. If everyone stashes their money away, stops spending, demand will fall, consumption will fall, economic growth will fall, banks can fail. That's what I call the paradox of thrift.

Usall: But if I keep my my money under my mattress?

JM: Then you are keeping money out of circulation, and banks will have no loanable funds and they will be out of business. You are not saving money, you are frantically hoarding currency. That's not the same as saving.


Whether you are an anti- or pro-Keynesian, you have to admire JM's persuasive logic in torpedoing a worthy quality like "thrift" with "paradox". Or turning the laudable act of "saving money" into the socially irresponsible and selfish pursuit of "frantically hoarding".

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