Many economists think that when consumers save money instead of spending it, a recession gets deeper. People start to stick money into mattresses for safe keeping in case they get fired. They may use it to pay off debt. No matter what the reason, it does not flow back into the purchase of goods and services.
According to The Wall Street Journal, in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the "paradox of thrift."
The flaw of looking at savings as undercutting spending and deepening a recession is that it looks at the beginning of the down cycle and not what helps bring about the end.
As prices of everything from cars to housing fall, the money which has been taken out of wages and put into savings to reduce credit balances is available for purchases. Items get so inexpensive that consumers are drawn back into the market. But, drawing them in depends on their ability to capitalize on weak demand and falling prices. A tax cut and stimulus package will increase that ability geometrically.
The trend toward savings may be bad this year, but it may be a salvation in 2010.
Douglas A. McIntyre