I'm posting this recent Krugman item because the "problem" of saving during a deflation has come up a lot lately, and the Professor does a great job of explaining it. (One of our examinations is here.)
Please read the whole Times piece (it's not very long); here's Krugman's conclusion:
And what that means is that if people — or the government — try to save more, they only end up depressing the economy. And the weaker economy leads to lower, not higher investment. And this in turn means that attempts to save more don’t help our future prospects. On the contrary, they reduce the economy’s future growth.We've talked about this a lot — how in deflationary (or dis-inflationary) times, it's important for individuals to switch from owning "things" to owning cash, and also to reduce debt and monthly expenses as much as possible. Why? Because cash is now king; deflation means the value of cash is constantly rising, the way the value of "things" rises in inflationary times.
That’s why fiscal austerity is such a terrible idea: no only does it raise unemployment, it actually makes us poorer in the long run.
Krugman is saying that in times like these, hoarding cash, while good for individuals, is actually deadly for an economic system. Our "switch to cash" advice is another way to say "increase savings", and "reduce debt" is the same, since debt is just "negative savings." Doing this helps us individually, but it also further depresses an economy that's in the sad condition ours is in.
And yet ... I'm not sure I'd personally offer myself up for the cause (and I don't think the Professor is saying I should). Thus, the "paradox of thrift."
GP
