Normal Durden

From Guest Post: The Paradox of Thrift — Debunked, submitted by Tyler Durden:

  • Savings channeled into new capital investment actually boost growth.
  • Savings are only harmful when used to repay debt or other non-productive purposes.

In other words, saving is not the problem. Repayment of debt is the problem.

Apparently, if you borrow the money for productive purposes, it's okay to welch on the debt


The whole argument of the post is that the Paradox of Thrift does not apply in "normal" times:

Keynes was correct in his observation that high level of savings caused a shortfall in national income, but we need to remember that he was writing in the 1930s — in the middle of the Great Depression... What Keynes observed was an anomaly caused by the financial crisis.

Under normal conditions, however, the paradox of thrift does not apply...

If the entire nation saves, there is no effect on national income provided savings are channeled through the financial system into new capital investment.

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy...

Actually, the post entangles analysis of economic forces with the self-interest of savers in the attempt to create a more convincing argument:

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees.

But such entanglements only make the argument weak.


Note the opening of the post:

Ever since John Maynard Keynes popularized the Paradox of Thrift, economists, central bankers and politicians have labored under the misapprehension that high levels of savings are bad for the economy and inhibit growth.

And this generalization, presented without evidence:

For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy.

Three generations. I suppose this means "since Keynes". Since 1936 would be 75 years, okay. But let's go back farther. Let's go back 110 years. From EconomPic, here's a look at the 10-year Treasury yield, a measure of interest rates. Note that the dates on the graph are month-and-year, not month-and day. This graph starts in September 1901:

From FDR to Reagan, interest rates were on the rise. Since Reagan, since Supply-Side economics was put in place, interest rates have fallen relentlessly. There is no 75 years of central bankers artificially reducing interest rates. And -- until the crisis forced changes in the backstory -- the story was that since Reagan, inflation was under control, money was sound, and interest rates were right where John Taylor said they should be.

But now the story's different.


In abnormal times, the post says, "Not only will national income fall when savings are used to repay debt, but it falls rapidly... The impact on national income — as evident from the 1930s — can be devastating."

So, in abnormal times the Paradox of Thrift holds true, according to the Borg-like Durden. What is not said is that the long-term growth of savings is central to the process by which we arrive at those abnormal times.