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Monday, March 27, 2017

Saving Paradox

Posted by Tim Stobbs on February 4, 2009

Over at the Globe and Mail there is part of an article that is driving me a little crazy.  It’s called Save Your Money or Save the Economy (pick one).  It’s like most other articles that I’ve seen lately that seem to say that we shouldn’t be all saving our money, because we need to spend to get out of this recession.

What drives me nuts about that logic is overspending and too much debt is what got us partly into this mess.  Saving over the long haul might actually do more good in my mind.  Over the short haul I agree its going to hurt the economy, but it might be required.

So how would savings help?  Let’s refresh our memories here.  Not too long ago a savings rate of 10% was common and they world was not crying out for people to spend more.  It was a balance of some savings and some spending.  The economy was fine.  So why can’t we be there again?  From my point of view what we are seeing in the economy is the removal of overspending that has become so common for a while that people consider it normal when it really isn’t.  Once that overspending is removed of course the economy is going to shrink, it shouldn’t have been that big in the first place.  So now everything is going to have to readjust to a new normal level of spending.

Here’s a another reason why savings in my mind are good.  Credit markets will flow again.  Banks with new deposits can lend more money.  You think the federal government is doing much buying $125 billion in mortgages?  You should see what we collective can do with TFSA’s.  If just 10 million of us on average max out those accounts (at $5000 each) you will see $50 billion in savings injected into the banks and other investments.  Times five years and we could collectively have $250 billion put away plus interest.  That could help in the long run don’t you think?

So overall I’m not buying the logic that I’m suppose to spend.  I’ve yet to excessively spend so far, so why would I change now?  So what are your thoughts on the saving vs spend debate?

Comments

12 Responses to “Saving Paradox”
  1. Phil says:

    I see it your way as well. Anybody would be foolish to spend their own money for the purpose of helping the economy if they had debt and insufficient savings. Besides, define insufficient savings. Most of us do not have enough to retire on AND to tide us over in the event of a medical or other emergency.

    I totally agree that what we are seeing is a return to the norm. Attempting to get the economy going again through spending instead of fixing what is broken, is simply going to delay the recovery process and extend the pain.

  2. Kei says:

    There is no paradox.

    Individually we plan ourselves over our lifetime (60, 70, 80+ years), obviously we need to save while we have the earning power and be prepared for the future. It is for the long-term benefit and I see nothing wrong with that. In fact everyone should be doing this.

    Politicians who claim we should spend more to be “patriotic” and “helping the economy”, their term in the office is about 5 years (or less). Their advices are often only focus on the immediate benefits. Their aim is to keep everything looks rosy during their term in power. Whatever happens after they step down means nothing. Telling us to “spend to save the economy” is no different than asking us to keep ourselves warm by adding fuel to the furnace while the house is on fire. They didn’t tell that us the house (the economy) will get completely gutted eventually.

    For people who has no (need for) long-term vision, being frugal means nothing because the benefit won’t come until 5, 10, 20+ years after. We need to ask why our government is having goals completely contradict that of our own.

    There is no paradox.

  3. Bob says:

    There was a decent discussion on this topic at EconTalk the other day. It is a bit long, but gave me a better idea of the basis for this paradox of thrift claim, although I can’t say I was won over.

    http://www.econtalk.org/archives/2009/01/fazzari_on_keyn.html

  4. hodaks says:

    Yes lets save money with low interest rates so we get low returns. Lets not borrow money when we have low interest rates and inflation.Lets not save money when the interest rate rises because of inflation. Lets borrow money at a higher rate, with higher prices.I think i may have to agree with you.

  5. KevinW says:

    Recently Warren Buffett was interviewed on PBS’ Nightly Business Report. He addressed this issue and said roughly the same thing: a sudden drop in spending of course hurts business in the short term, but long term it might actually be good for companies to do business with savers instead of overspenders.

    I’ve worked at a company that was growing too fast, and one that was shrinking too fast, and both are very wasteful and stressful. I think companies would be more efficient and profitable if they could depend on a steady stream of sustainable spending, rather than these overspending/oversaving boom/bust cycles.

  6. Spending is what drives the economy. Look at it this way. You make bread, and someone else buys bread. If that someone decided to go hungry one day and not buy your bread then your bread goes to waste and you lose the income you would have made plus the flour and heat to make the bread. If you relied on the income from today’s sale to buy flour for tomorrow’s bread then maybe your business goes under — because someone saved instead of spent.

    There is no need to “save” as an absolute concept, forever. It should be a flow. You provide something to the world and get money in exchange, which you have to give back to the world so that others can do the same as you. You should consume almost everything you make during your lifetime anyway or else what were you doing?

    I don’t mind the idea of saving for a rainy day, or using money as a resource to make more money and consume more. Saving as hoarding is not helpful for the economy. That said, I don’t “waste” my money on people who don’t offer me things that are useful. Like do we need to employ people in making the 10,000th different model of cell phone? I don’t think so.

    In my opinion, credit is what go us into the mess. That is, consuming future dollars. This is a terrible sin.

  7. Paula says:

    It’s called the morality of rational self interest. If you don’t look after yourself first what’s left?

  8. James says:

    I like the article, in general, but disagree. Spending did not put us in our situation, overspending did (spending future dollars).

    I did want to comment on your example though…

    “If just 10 million of us on average max out those (TFSA)s…”

    Just 10 million! There are only 20 million people in Canada aged 18-65. The median income is below $30k per individual. There can be no reasonable expectation that half of the population can maximize the TFSA.

    Spending to stimulate the economy is socialized saving. We are after-all a socialist country. For every dollar spent you are “saving” for everyone else in the form of gov’t sponsored benefits. Excessive saving (or hoarding) by the mass populace is actually detrimental to the socialist savings plan and erodes the purchasing power of the savings itself.

  9. Cash Canuck says:

    I’m glad to see others are of a similar mind to me. In the short run, sure the economy will be harmed by saving. In the long run however, I’ll have more money to spend, since I’ll be accumulating interest instead of paying it.

    If interest charges from my overspending today amount to $250/month. That 250 bucks is gone forever. If I spend the interest I accumulate from my savings, we will all be better off eventually.

    Obviously this is no solace to the auto workers (scratch that, FORESTRY workers) who are jobless right now. Also, politicians only look as far as the next election. If they can stimulate the economy for just a year or two, they can point back and say “See?! We fixed it!”

  10. Canadian Dream says:

    Kei,

    Good comment. Thanks.

    CR,

    Very good points, we are just time shifting by savings. Consuming later rather than now. I agree saving forever is just wasteful.

    James,

    I was just picking round numbers off the top of my head. Free free to adjust it to anything you like. I really don’t expect everyone to max a TFSA. Hell the only reason I’m going to do it this year is to move money I already have into those accounts.

    CC,

    Now isn’t that the truth. Regardless of the stimulus works the politicians will say “Look we did it!” like some how I should thank them for putting my kids into more debt since I’m never going to see it get paid off. *sigh*

    Tim

  11. LifeArtist says:

    Sigh… It seems like whatever one does, there is going to be someone telling you it is wrong.

    For those “doing their part” to keep the economy going, not saving and possibly going into debt, are they counting on society to take care of them when they can no longer work? Are the younger generations expected to keep Social Security and Medicare going for retired baby boomers AND keep up with the massive debt we have created for them?

    I for one don’t believe it is possible. If you don’t want to spend your later years in poverty, start “hoarding” now.

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