The Paradox of Thrift!!

What would life be devoid of any ironies or paradoxes. Quiet lackadaisical I presume. The textbooks would be quiet skinny and straightforward then.

Let us look at this paradox- that hits us most in these times; especially since we are in India where profligacy is abandoned and thrift is espoused.

How many of us invest in shares or mutual funds vis-a-vis how many of us have parked our cash in the savings account? How many of us save a pleasant day today for a bright future years ahead? For most of us its innate to play safe and saving is the order of the day. The credit crisis in US further validates our conservative spend designs. We scoff at people (and rightly so); who take credit of many many times more than they earn without realizing that one lifetime would not be enough to payback. We live lives in our dreams which we hope might come true in the distant future. Right from the grandma's tales , panchatantra, Aesop fables, to "dont count the chickens before they are hatched"; we are conditioned to be conservative and save our resources; be it time, money or breath.

Thrifty is not being stingy, but being provident. Whats wrong in being thrifty?? Nothing. and I am not writing to even try and metamorphose what seems to be a congenital trait in most of the denizens of the Indian subcontinent..(including me)

But this paradox which I am going to write on; seems ineluctable at the current recession times. Suddenly you see the regular itinerant- reluctant to plan his next trip; or the avid book reader- substituting documentaries and the idiot box for books or the self proclaimed gourmet sticking to home food(he claims that his recent abstemoius ways are more to do with the recent doctor's call). Its happening all around us and we are suffering the recession long before it reaches us. Even that is fine; we love suffering (see history, movies, your neighbors) and you know what I mean.

My concern is are we begetting recession and worsening the current economic plight. The paradox of thrift states just that.

Lets all start saving. We buy lesser, forcing companies to produce lesser; thereby decelerating economic activity; inducing downturns-slowdowns-downsizing; leading to reduction of incomes - leaving even lesser amount with us for discretionary spending and this vicious circle goes on...Keynes multiplier works but in the reverse spiral.
And the economic activity retracts further ; worsening the crisis.
Well we may not realise this at the individual level but this would be the aggregate picture
Thats why the central banks use an expansionary monetary policy reducing bank and reserve rates; thereby increasing money supply in the market to reverse the multiplier in the positive direction. And so do governments increase fiscal spending to drive employment and infrastructure growth- capital formation.

Keynes was a great economist and he was particularly right in elucidating this paradox.

Critics of this paradox had pointed out that saving in banks in turn leads to loanable fund which in turn leads to more credit and investment + growth. Well they are only partly right. In the current credit crisis, lowering of rates or mere increase in bank deposits have not lead to a proportionate increase in the banks lending credit. On the other hand , banks have tightened their approval policy and rightly so post the sub-prime.
With the reserve bank and govt' playing their roles- what do we do. We do what we would ideally like to do


Plan a travel itinerary, read new books, check out the latest movies, restaurants, join more clubs, buy more(of course within our credit limits). Whats more there would be better than ever sales and offers in these times.

Well thats enough motivation for me to go out and splurge. Nice food for thought for this Holi season. The Diwali sales dipped hugely last year- but its festive time again. It feels good to see that every rupee spent might be a good thing for our economy. Afterall each drop makes an ocean!!!

Happy holi!!

Consumer:To spend or not to spend?
Bank: To lend or not to lend?

Consultant Keynes:
Too much of providence
begets too less of economic action
Enhance Your spend tolerance
and alleviate the crisis fraction by fraction