Thursday, October 7, 2010

Basic Economics

Many of our largest and most significant industries still have business models that rely on the use of debt to purchase goods and services. Unless you’re a multimillionaire, it’s difficult to make significant purchases — college tuition, a Viking stove, a Toyota Prius, computers, jewelry, a house — out of savings or cash flow from wages. The renewed willingness and confidence to spend money we don’t have is vital to the continuing recovery.

John Maynard Keynes wrote of the paradox of thrift — if everyone saves, everyone becomes poorer, because demand for goods and services will fall. Here’s another paradox: Running up consumer debt may be a moral failure and a recipe for long-term damnation, but it also contains the roots of our short-term salvation.

Daniel Gross, author of “Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation,” is the economics editor and columnist at Yahoo! Finance.
These concluding paragraphs from an op-ed in yesterday's NY Times struck me as interesting.

First, the author is wrong, regardless of whether you are a multimillionaire or not, you spend what you have or will have. There is never a free lunch. The only thing to remember is that you can spend today and save tomorrow (also known as paying back), or you can save today and spend tomorrow. Regardless, in order to consume, you MUST save. Any notion to the contrary is just nonsense.

The paradox of thrift is not really a paradox. It's true that if people decide to stop trading, there is less value in society, but it's vitally important to realize why. Is it because their is less stuff in society? The answer is no, the amount of stuff produced is exactly the same. Saving only means that you don't trade (spend), it does not make any statements with regards to production. So if the amount of stuff (consumer goods) out there is the same, how can I say we are actually poorer? I'll leave it to someone to comment on.

And a final, personal note. Just because the road to hell is paved with good intentions, doesn't mean we should travel down it for a while and see what great things we can achieve before the Inferno envelopes us.


Eric Pearson, for U.S. Congress said...
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Alla said...

when there is less trade, people are poorer because trading adds value - people trade what they value less for what they value more.

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