Thursday, March 12, 2009

Americans saving more and the "paradox of thrift"

The graphic below clearly shows that though disposable incomes (income households have available to spend or save) have been increasing in the US, despite the recession, consumer spending has been declining. Casey Mulligan claims that "the fundamental cause of low consumption spending is consumers’ recognition that their homes and businesses are worth less", and suggests that consumer spending may be headed even lower.

While the increase in savings is a welcome development, what raises concern is its timing. Paul Krugman writes about this Paradox of thrift, "Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever." And other paradoxes, including paradoxes of deflation and deleveraging are discussed here.

1 comment:

Michael Shanklin said...

The paradox of thrift is a fallacy!