Monday, February 02, 2009

Good News or Bad News?

The good news is that, Americans are saving again. Unfortunately, that is also the bad news.
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, 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.
We should never lose sight of the fact we are where we are because of the mistaken Republican belief that easy credit was how to build an economy. Now that this has proven, once again, to be false we are now faced with the reality that when things get tight we pull back and hold on to our money. If we had spent the last 20 years adding wage earners and good salaries to the economy encouraging both spending and saving we would be a whole lot better off. Now we face the awful prospects of a deflationary spiral and a continued weakening of the economy.

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