The Paradox of Thirft

Should we ALWAYS save?

Keynes (binary/octet-stream)

Caption: : John Maynard Keynes

 The Lock-down due to the Corona virus is expected to result in a recession: people will lose jobs, companies will not invest in new technology, people will feel negative about the future The economist John Maynard Keynes (two brains-Keynes to his friends) studied this trend and called it 'The paradox of Thrift' The Paradox of Thrift becomes relevant in a recession because it explains how a very good idea can turn into trouble

In a recession people and companies spend less and reduce borrowings because they do not feel confident about the future (negative sentiment) because people and companies spend less, they actually save MORE So while more and more people are worried about their finances and are afraid of becoming poor, most of them are actually sitting on growing savings (literally; they are afraid of being poor while they have more money)

Saving more is at the same time a VERY SENSIBLE individual choice (good for the micro-economics point of view)  and a bad collective choice because if we all start doing it at the same time, it hurts the economy (bad from the MACRO-economics point of view) This why it is called a 'paradox' Keynes observed this phenomenon in The Great Depression. We have seen it in the 2008 Great Recession too. People simply started saving more and more because they were afraid

Macro vs Micro

Characters (binary/octet-stream)

Caption: : What is right for macroeconomics (the economy as a whole) is not always good for microeconomics (the individual's use of resources)

So is saving bad? Good? Saving is a smart habit (saving is a long term exercise) but at some point it might hurt the economy and these two contradictions are expressed by Keynes' 'Paradox of Thrift'

Good or bad?

Thrift to (the economy's) rescue

While the Great Depression was raging in the Thirties, Keynes called for the government to step in to be the BIG SPENDER of the last resort He argued the Government could borrow money from all those people who were sitting on their BIG savings and then it could start mass campaigns of employment: for example: building bridges, hospitals, new roads or new school. This spending program would create jobs, improve confidence, inject money in the system (because people would start spending more money) and stave off the monster of deflation and mass unemployment For Keynes, the main thing was increasing demand What do you think?