Many economists today, including the recent Nobel Prize winner Paul Krugman, claim that America may be suffering from the paradox of thrift. This paradox, which was coined by John Meynard Keynes, comes about when people begin saving their money during economic calamities, rather than spending their money. This results in an even worse economic situation as more people lose jobs as corporations face lower revenues. When the economy needs increased spending the most, it gets more saving. Here is a good video from the Colbert report where the author, Dan Gross, makes this same claim:
But, the ultimate problem with our economy is it has been fueled by debt for many years now. Our savings rate, as a nation, has been dropping since the early 90s, and it hit rock bottom in 2007 – all the way to 0%.
By continuing to spend or not save, we may feel less pain now, but we will never correct this structural imbalance, which means we will never experience any true, robust economic growth. This is essentially like giving a fix to a drug addict. It may feel good, but it does nothing to cure the addict of his addiction.
The person who swims upstream to wealth realizes that savings is critical to economic success. We should be saving as much as we can to not only better our individual situation, but it will help the country in the long run. Many of our technological breakthroughs developed because these companies or entrepreneurs had access to capital. This capital came from savings. The Depression generations saved almost 12% of their income throughout their lives. Not only did this help them financially, but it led to the boom years of the 80s and 90s. So ignore the pitches by economic gurus and politicians that we need to spend, spend, spend. If you want to experience real economic boom times again, we need to save, save, save.