Please give your views or commentts on this person\'s thoughts on paradox of thr
ID: 1141127 • Letter: P
Question
Please give your views or commentts on this person's thoughts on paradox of thrift.
1. What is paradox of thrift? Is it real? Is Saving Good or Bad?
A paradox of thrift is when the growth of the economy slows down because less money is being put back into the economy through consumer consumption and spending. When people stop borrowing money, buying new cars and purchasing homes and put more money into funding retirement and savings. Paradox of thrift is the ripple effect of people choosing to be more frugal by eating out less and saving for major purchases. I like the quote by Vermann, “saving can have unintended consequences because one person's consumption is another person's income”. When there’s a decrease in spending the economy has to be impacted, but for it to be detrimental to the economy means really large numbers of the population need to be operating in this capacity, and I generally believe you will always have spenders and savers. Sizemore noted in his article that only 53% of household have savings. Some people are always going to live paycheck to paycheck no matter what.
Yes, I believe paradox of thrift is real, but are enough people spending less to stifle the economy…I don’t know the answer to that, but I think savings is not only a good thing, it’s a must. We have to be able to maintain and survive during hard times and that means preparation and preparation means saving. No matter the state of the economy, in my opinion, saving should be the practice in every household. I would even go as far to say not saving is bad.
2. Give an example of the paradox of thrift.
An example of paradox of thrift is a growing family needing a bigger house. Multiple children sharing rooms, not enough bathrooms to handle a large family’s needs. No yard space for kids to play and run around. The family already has large savings account but decided to continue to save instead of investing in a new home, negatively impacting the housing market.
3. What is the reverse paradox of thrift?
The reverse paradox of thrift is spending increases, sales go up, resources are used up causing increase in production, employment is high, and incomes increase. As people make more money, their saving increase. Glaivester explains it as “more consumption of a business's products means more prosperity, then spending more in general creates more prosperity.” (The "Paradox of Thrift" in Reverse, 2009).
4. Reflection -
I had never heard of paradox of thrift, although I believe there are real consequences for shifts in economic spending patterns and habits, but I also believe the market makes adjustments (Muddy Water Macro calls it market adjustment mechanisms) when changes occur. I learned how the interest rate plays a key role in keeping the economy stable. I have witness the practice of purchasing equipment and technology on my current job when the interest rates are low; taking advantage of cheaper loans. An example of the rise of investment and consumption induced by the lower interest rate.
References
The "Paradox of Thrift" in Reverse. (2009, December 23). Retrieved from Glaivester.blogspot.com: http://glaivester.blogspot.com/2009/12/paradox-of-thrift-in-reverse.html
Explanation / Answer
According to me,
The paradox of thrift is a theory that suggests that if people cut spending to increase the amount they save, then aggravate savings will fall because that money not being spent, is also being taken away from someone else’s’ income. Saving is good for the person doing the saving because it creates financial security and allows them to maintain a way of live, but it can the economy. The idea of savings is great, but if everyone started saving their money and not spending any more than absolutely necessary, more and more people would be forced out of work. An example of the paradox shift would be if someone wanted to save money to buy a new house, so they left their apartment and moved in with their parents until they could afford it. They would be taking away from the income of the landlord, cable company, heat and electric, phone company and other services that the used while living independently. With those examples making less money, they might need to consume less, reduce employees’ hours or even fire employees.
The paradox of thrift is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals' attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy.
The paradox of thrift has been related to the debt deflation theory of economic crises, being called "the paradox of debt"--- people save not to increase savings, but rather to pay down debt. As well, a paradox of toil and a paradox of flexibility have been proposed: A willingness to work more in a liquidity trap and wage flexibility after a debt deflation shock may lead not only to lower wages, but lower employment.