The Savings Paradox

image by: illuminator999

image by: illuminator999

Let’s take a moment to review a theory proposed by John Maynard Keynes almost 100 years ago. Everyone would agree that it is beneficial for an individual to save money. However, what happens when a society saves too much? The savings paradox suggests that when society as a whole does not spend money less goods are consumed, leading to businesses being less profitable. Consequently, wages are lowered and jobs are lost, causing people to have less money and to be able to afford to save less. Thus, if an entire population saved more, our total savings rate would stay steady or even decrease over time because of lower incomes and a weaker economy.

Non-Keynesian economists argue that if people stop spending prices will fall, stimulating demand. Additionally, people have a choice of saving money either by putting it under their mattress or by loaning it to someone who will spend it. More people saving represents an increase in supply of loanable funds, which will lower the cost of borrowing. If the cost of borrowing is low, more people will borrow and spend funds, which will stimulate the economy and bring incomes back to normal levels.

This debate continues today. Whichever camp you fall into, almost everyone agrees that reasonable spending and saving levels are desirable. Besides, there is a difference between saving money and delaying purchases. Saving is a fiscally responsible action. Delaying purchases is the type of action that, done on a large scale, can cause an economy to falter.

About the author

Lon Jefferies, CFP®, MBA
Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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