Saving money hurts the economy?

[intelliot]

Kevin Connolly: Yesterday we learned that the US savings rate hit 5% in January (which means that Americans banked five dollars out of every hundred dollars that they earned).

In January last year, the rate was 0.1% and even that was an improvement on 2005 when America as a whole actually spent MORE than it earned.

So far so good. In the long run, a solid savings rate is a good thing. But sometimes you have to read one set of statistics in conjunction with another.

Consider this, for example. In January, General Motors' sales fell by an eye-watering 53% and neither Ford nor Toyota fared much better.

So saving, a good thing in the long run, can be destructive in the short-term because no spending means no sales and no sales means, in the end, no jobs.

Have Mr Obama's attempts to convey the severity of the recession panicked Americans into cutting back so hard that their thriftiness is hurting the economy?

How do you refute this?

[theoakman]

How do you refute this?

if people had savings, they wouldn't be begging for a bailout.

[Josh_LA]

Yes, saving money hurts the economy, just like not breaking windows hurts the economy.

Who ever said helping the economy is a good thing?
Since when did a capitalist care about others?

Of course I want to choke others of their wealth! Since when did politicians and businessmen want to help the economy? Helping the economy is like helping people's health and happiness, it often is a zero-sum game where you give some by losing some on your own.

[ChaosControl]

It doesn't. The problem is we are a credit society. We have to go through pain as we convert to a more sustainable savings based economy. Imagine, people only spending money they have rather than money they don't have.

[Josh_LA]

It doesn't. The problem is we are a credit society. We have to go through pain as we convert to a more sustainable savings based economy. Imagine, people only spending money they have rather than money they don't have.

Yes, it IS hurting our credit economy, and we SHOULD hurt it, in fact, we should KILL IT.

Saying that saving money hurts the (our credit/debt) economy is saying that reduction of crime makes policemen unemployed, why is that bad?

[tremendoustie]

How do you refute this?

In a healthy, free economy, savings is fine. It is only because our economy is based on debt and consumption that this is a problem.

In a truly free economy, decreases in spending and increases in savings would cause the prices of goods and services to decrease. Companies would be forced to cut prices, as fewer dollars are chasing their goods. However, since this would be true across the board, they would also be able to buy supplies and pay employees for less, so business would not be disrupted.

Decreasing prices provide an incentive for savers to enter the market. For example, say you've got 10 grand saved. If a new car costs 10 grand, you may not want to use all your savings on it. But, if the price drops, you would be more willing to spend your savings.

Thus, new spenders emerge, and prices stabilize.

In our economy, there are way too many regulations to allow for rapid adjustment -- decreasing wages, for example, is very difficult. There are price controls in many areas. This causes decreases in spending to have a greater disruptive effect. Furthermore, many of the jobs in our economy are not productive at all, but are based on recapturing a small portion of spending. For example, if you buy a new HDTV, some of the money goes to the sales guy, and the local store, but a lot of it goes to China. Because of our trade defecit, these jobs rely on ever increasing debt and spending --- if consumption ever equaled production in the U.S., as it should, many of these jobs would disappear.

In short, in a healthy, free economy, increased savings is fine. In our phony, debt based, government managed economy, it means the end of the fake prosperity.

[Trigonx]

Also, if more is being saved and put into the bank doesn't that mean the bank has more deposits to lend out, which would help the economy(theoretically that is if the banks actually lend)?

also, if the bad banks are actually allowed to go under and all the good banks remain, wouldn't savings be the best thing for them? since the banks who have a reputation of being sound would have plenty of cash to lend because of the plentiful saving.

[enjerth]

I read an article that poked a nice big hole in that argument.

People don't save money for the sake of saving money. They save money for spending LATER. To spend later on a new TV, a new car, a new house, to spend during retirement, or to spend during an emergency. So it's not a matter of spending vs saving, so much as spending NOW vs spending LATER.

There always comes a time when the consumer decides that he needs to spend later as opposed to spending now. That becomes destructive when more and more people decide to spend later, but borne out it would result in more business later when consumer spending picks up again.

The economy must always adapt to the spending habits of the consumer. This reorganization is natural and healthy. We only get chaos when giant corporations refuse to adapt, supported to that end by the government.

The business cycle is a complete cycle. But someone is sticking a broom handle in the spokes.

[Paulitician]

It's complete bullshit. It's not possible to save and not have a downturn "in the short run" in this case (not always though).

It's the countercyclical mentality, that savings should in fact go down in order to keep the economy afloat (some people don't get that the previous economy isn't sustainable, making all attempts to prop it up or restore it counterproductives, as well as futile).

[smithtg]

Krugman believes all this BS too. SPEND COMRADES SPEND!!

[Knighted]

How do you refute this?
An immediate, excessive jump in savings can be bad for the economy in the short run, since it can cause a demand shock. But in the long run, as long as that money is available to be lent out (deposited in a bank for instance, not stuffed under a mattress) it should be just as beneficial as spending is to the economy if going from high savings to higher savings, and far more beneficial if moving from a nonexistant savings rate to a higher one as is currently the case for us.

I think that a good example of how saving money can be good for the economy is what was once called Japanese "post-war economic miracle." The Japanese sported one of the highest savings rates in the world even after adjusting for their government's accounting methods used to calculate it. They had almost three decades of enormous growth that left most of the world in the dust. An impressive accomplishment for a country that had not long before been the guinea pig for the US government's nuclear bomb tests. If you pull up the Japanese historical savings rates, you'll find that the savings rate began a significant decline from its peak starting in the 1970's. It continued falling all the way to the 1990 collapse of the Japanese stock market, and has kept up that decline to today, where the savings rate from what i've been able to interpolate is almost identical to the US's (close to zero.) And what has this massive increase in spending accompanied by a massive decrease in saving gotten them? Answer: an entire lost decade plus another decade filled with economic stagnation, not to mention the 2nd largest national debt in the world due to Keynesian spending (after Zimbabwe). Using the Japanese economy as a paradigm, it's really hard to believe that increased spending could possibly get us out of this mess.

[Hiki]

One of the banks here in Finland has an ad like on every bus-stop in my hometown. It has a evil-looking piggy bank on it with bloody fangs and a text saying "Don't feed the depression by saving!" And then it wants me to go calculate how much my savings hurt the nation's economy :rolleyes:

[hugolp]

Yes, and working is bad for the economy as well, because it consumres resources and takes employement from other people. :rolleyes: Thats why the politicians dont work shit, because they are very patriotic.

I bet you that if you teach this in college people would end up believing it.

Hugo

[tremendoustie]

One of the banks here in Finland has an ad like on every bus-stop in my hometown. It has a evil-looking piggy bank on it with bloody fangs and a text saying "Don't feed the depression by saving!" And then it wants me to go calculate how much my savings hurt the nation's economy :rolleyes:

Do me a favor -- save. All of the empty piggy banks in the world won't fix anything, it will just make the crash all the more painful for the people when it comes.