Saving is counterintuitive? The paradox of thrift

Late last year, Malacanang urged Filipinos to tighten their belts some more by saving money and being more thrifty. The monetary authorities embarked on initiatives to promote financial learning that aim to promote a culture of savings. Early this year, a monetary board member urged Filipinos to strengthen their personal finances and help the economy by saving more in banks.

Global consumer confidence is down and a local survey shows consumers see buying conditions in the next quarter less favorable, as the Filipinos’ spare cash is primarily intended for savings. Overseas remittances are seen to go flat this year, and in the first four months of the year, US remittances actually went down. Households have to curtail their spending. Filipinos become more prudent and cautious. In fact the IMF has said that Philippine households showed significant increases in savings rates, thereby cutting domestic demand. Is the government's plea to save now heeded?

But wait! Jollibee and SM are getting worried. Now economists warn us saving at this time will not do us any good. Contrary to what intuition or common sense would indicate, saving now will do us more harm. How is this going to happen?

From Wikipedia: "The paradox of thrift (or Paradox of Saving) is a paradox of economics propounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth."

Old school economics say that since what was saved was later invested, there could not be excessive saving. But later Keynes asserted that thrift is virtuous only up to a point. If we increase the proportion of income we save, the reduced expenditure on goods will lower total demand in the economy. Thrift is laudable up to the point businessmen in the economy wish to borrow our savings for investment.

A former NEDA chairman and the monetary authority share the sentiment that further precautionary saving will worsen the country’s current economic conditions.

What happened to their pontifications that frugality is good for our families and the economy? It took a receding economy to be an eye-opener for us to be wise with our money. This is a natural reaction to our increased awareness of our fragile economic state.

But is it going to be a problem?

Why do big business and government authorities want us consumers to fuel economic growth?

Big business and government must also do more to help the economy along. What good is growth if it is not spread among the many? Make sure that the stimulus package is not siphoned off by greed. Be satisfied with moderate growth profits. Please moderate the greed.