Paradox of Thrift | Article by Your Payday Loan Source

Why saving and smart spending are bad for the economy

As Americans put money away for a rainy day to avoid needing a payday loan, they are actually worsening an already shrinking economy. Economists call it the “paradox of thrift,” according to the Wall Street Journal.

When people have less money, they spend less money. (I know what you’re thinking: “Duh!”) All of the money-saving tips that have been shared between friends and reported by the media are helping Americans be more frugal. But every dollar Americans don’t spend is a dollar that a store doesn’t see. Add enough of those dollars up, and you have a store closing.

Great ideas that are dragging out the recession

The spread of American thriftiness is being seen all over. Business is booming for discount retailers as high-priced retail stores are shutting their doors. People are finding ways to save money on necessities and aren’t buying luxuries. And, statistics show, more Americans are tucking their money away in savings.

My grandpa would be proud. As long as I’ve known him, he’s had a big chunk of money saved up or invested. He always warned me against accruing debt and using credit cards. He paid for all his cars in cash. He bargain-shops, even though he has millions. So is my grandpa a bad example? Of course not! These habits are really great — when the economy is doing really great.

Catch 22

Putting money into savings is very good for the economy when the economy is doing well. It creates a backup for times like these, when the economy is doing poorly. Just think, if Americans had been saving money when they had it instead of spending money they didn’t have and accruing debt, we wouldn’t even be in this recession right now.

So, basically, it’s good for Americans to not spend money when they do have it and to spend it when they don’t have it. Technically and economically speaking, this is true. But is it realistic? Read the newspaper. Obviously that is not what’s happening.

What to do?

So should Americans go and blow the last of their money on things they don’t need? Should they take out a payday loan to buy designer jeans instead of picking up a pair at a thrift store? Should they worsen their already dismal credit scores by accruing more bad debt?

Of course not. Eventually, the economy will turn around. The only question remaining is when that will be. The truth is, saving and frugality won’t perpetuate this shrinking economy indefinitely. They will simply draw it out a bit longer.

Teach your grandkids

The good news: When the economy does turn around, Americans will emerge with good habits, like my Grandpa emerged from the Great Depression with good habits. So the economy will go through an ideal period period, when people will save their extra money and buy less on credit.

But, as we’ve seen throughout history, the economy goes through this up-and-down cycle endlessly. Sure, maybe WE will save money, and we’ll tell our kids to save money. And they’ll kind of do it, even though they weren’t there to experience why it is so important to save money. So it’ll get watered down a bit when they tell it to their kids. And so on.

Will it ever end?

If financial education becomes mandatory starting in elementary school, we just might have a shot at maintaining a healthy, growing economy for a while. Kansas is trying to enact a law to make personal finance a regular subject, starting in kindergarten and continuing to graduation.

But there’s only so much individuals can do. Investment banks and mortgage lenders control so much capital that any missteps on their part could trigger another financial crisis. Hopefully if that time ever comes, your grandkids will still be able to get a payday loan in an emergency.