Monday, February 02, 2009

The paradox of thrift

Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.

Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.

On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.

Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.

The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.

Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.

"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."

[via chucks_angels]

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