Is Saving Good for the Economy?

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Category:

Education

Tags:

• saving
• _spending
• _financial_crisis
• _recession

[StrKG9]

It makes more sense now. As I was aware of only Keynesian ,thrift theory and couldn't understand how savings is good for the economy.... Would be great to see more in-depth analysis.

[judenoon]

(cont'd from below post) That's the reason Obama tries to convince China and other East Asian nations that they have to encourage more local consumption, that they should not rely on Americans to buy their products and that they should buy more products from America. But as long as the American economic structure remains the same, sudden decrease in spending (and increase in saving) will surely do a lot of damage to its GDP.

[judenoon]

(cont'd from below post) Savings and investment are good for the economy if and when there are consumers who will buy whatever are created as the final products of those investment. I do agree that the current pattern of overspending by American consumers are not sustainable. More saving is warranted, but it has to be accompanied by structural adjustment of the American economy.

[judenoon]

(cont'd from below post) The point here is that it is not that the creator of "Paradox of Thrift" model does not understand what the Counter-argument say about what the benefits of savings and investment have on the economy. It is just that investment must also be accompanied by consumers' willingness to spend. The booming investment in China in the past decade was accompanied by the American consumers' willingness to buy its products.

[judenoon]

(cont'd from below post) The desirable kind of investment i.e. creation of capital goods will also shrink, as investors will shy away from investing if they think they will not be able to sell more products in the future. This is not to say that since Paradox of Thrift holds true, so we should encourage consumers to overspend forever. Perpetual overspending by borrowing to spend creates other kinds of problems such as credit market instability which is for another discussion altogether.

[judenoon]

(cont'd from below post) So if the US wants to pursue growth via more savings, it needs to change the structure of the economy from mainly consumption-led to a more balanced one i.e. more exports. And this cannot be changed overnight, so the Paradox of Thrift currently holds true for the US.

[judenoon]

(cont'd from below post) But if the consumer confidence in the US remains low, businesses might not necessarily increase their "intended" investment even if there are plenty of savings from the public. So, if people start to save more, it might result in an increase of "unintended" investment i.e. increased inventories of unsold goods instead. And the unintended investment is obviously bad for GDP, as businesses will further reduce their production, thereby causing further shrinkage in GDP.

[judenoon]

(cont'd from below post) However, if countries like the US, whose people have overspent for a long time, start to experience sharp increase in savings, it will surely affect GDP negatively, unless out of sudden American products become much more competitive and exports pick up drastically (unlikely scenarios.) Also unfortunately for the US at the moment, businesses will only invest if they think they can sell more (the counter-argument diagram.)

[judenoon]

(cont'd from below post) The success of the East Asian countries' economies (think China) are based on their ability to export a lot (especially to countries like the US where consumption appetites are limitless). So high savings in those countries are good, as it allows businesses to have funding sources to borrow for investment (as illustrated in the counter-argument diagram.)

[judenoon]

(cont'd) from below post) If government intervene by some stimulating program or if the country can increase its net export, then GDP might not shrink after all. The problems are government cannot forever stimulate the economy (as it will incur budget deficit and too much budget deficit will jeopardize the solvency of the government) and foreigners will buy more only the country's products or services are competitive.