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I'm having too much fun, one more: paradox #4: The Paradox of Thrift: it's impossible for everyone to save more.
This is from macroeconomics and was popularized by Keynes. There's some debate around the edges that I'll touch on at the end. /1
This is from macroeconomics and was popularized by Keynes. There's some debate around the edges that I'll touch on at the end. /1
2/ since leaving the gold standard, we've generally seen savings rates fall in developed economies. People sometimes note with concern that the average American doesn't even have a year of savings to weather tough times. Should everyone save more?
3/ Let's imagine that every individual increases their savings rate (*important to note that *savings* does not include investments by definition in this framework.) What happens next?
4/ the increase in savings has to come out of some mix of *investing* and *consumption.* The fall in either/both of these, means that total revenue for companies must fall, leading to a reduction in output and less income to employees.
5/ less income means less money available to save. So in aggregate, if every individual increases their savings, they counterproductively reduce their collective income which reduces the amount they can save in absolute terms.
6/ that's the simple version, which as you'd expect, faces plenty of criticism. A. increased savings may result in lower prices allowing for new equilibrium without falling productivity. The paradox still survives this criticism if a. prices are sticky, or b. desire to save
7/ increases at all price levels. B. An increase in literal savings by individuals might cause an increase in investment by increasing the loanable funds held at banks. Okay, but this kind of sidesteps the paradox since in this version, investment makes up the difference.
8/ C. It's worth noting that while true in the aggregate, we could certainly see savings increase among specific populations or sectors or industries. Similarly, a *country* can escape this paradox if other trading partners take the opposite side and reduce savings.
9/ Specific takeaway: with many macroeconomic variables (like savings), we get secondary effects that negate the primary one leading to counterintuitive outcomes. General takeaway: you can't simply extrapolate behavior from an individual to a group.
10/ last point: Every individual on the earth can save more if governments replace the lost consumption; then corporate revenues don't fall. Governments play an increasingly large role in macroeconomic balances. China, for example, currently holds about $1T in US treasuries.
11/ one last thing - this paradox only exists using the technical jargon that distinguishes "savings" from "investment". From an average saver's perspective, they likely think of owning corporate bonds as "savings" (even though that's technically "investment.")
