Wednesday, September 9, 2009
"Rapid De-leveraging" = Paradox of Thrift
NPRs Planet Money reports on the record fall in consumer borrowing. Americans slashed their borrowing by $21.6 billion from June to July. They go on to state that this represents a crisis of rapid de-leveraging. But while this might be a new and fancy-sounding term, it is nothing new: this it the same thing as the paradox of thrift. Individuals that increase savings are considered to be doing a good thing, but when everyone in an economy does it at the some time it can cause a big drop in consumer demand. As consumer spending represents about 70% of the economic activity in the US economy, this can be a painful adjustment process. What this report shows is that we are still well in the process of this adjustment and thus we should not be looking for a robust recovery any time soon.