To save, or not to save – that is the question.

With the increasing unease in the financial markets around the world and the contraction of many leading economies there has been a resurgence in an unfashionable word -THRIFT. Recent years has seen consumer access to an unprecedented level of liquidity and many who borrowed heavily during this period are now tempted to repay debt and behave in a more prudent manner which, over the last few years, has been seriously out of character. As governments and central banks scramble to try and stimulate spending, by the lowering of interest rates and introducing various tax reforms, does this rise in thriftiness have serious consequences to politicians worldwide? Thrift can become very threatening to a nation. One only needs to turn the clock back on the Japanese economy to realise that a near zero interest rate in the mid 1990s had little effect on a thrifty consumer. Japan subsequently experienced a period of stagnant growth. Many countries today face a similar scenario and the need to keep consumers spending in difficult times is what John Maynard Keynes called ‘the paradox of thrift’. During the 1930s depression Keynes told an audience:

The best guess I can make is that when you save five shillings, you put a man out of work for a day. Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good … and have the added joy that you are increasing employment, adding to the wealth of the country.

However, with the downturn in an economy, it is a perfectly rational response for consumers to be more prudent in their spending especially with the threat of job losses. Although this might be a rational stance for the individual, it is highly irrational for society as a whole as economic activity is reduced which ultimately leads to business failures and job losses. Therefore by increasing saving, society ends up saving less because there is less income to save from. Economists call this the ‘fallacy of composition’.

What is clear is that this recession will have a psychological effect well beyond the facts and figures of income change and unemployment. It is not about thrift or updating of a thrift ethic rather changing the way you behave. However, are the words of Freddie Mercury and Queen still extremely relevant? “I WANT IT ALL AND I WANT IT NOW.”

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