Paradox of thrift

Economics is a dark art, plied by it's unholy denizens on windless nights when the moon is near full. There are two cabals who contend for supremacy in this titanic struggle, the Keynesians and the Monetarists. But where lies the truth?

I do not pretend to understand the complexity of theory of modern economics but have been following the battle recently and here are the players: The followers of Keynes - British economist John Maynard Keynes, 1st Baron Keynes (pronounced /ˈkeɪnz/ "cains") - June 5, 1883 – April 21, 1946, who believed that governments should intervene to counter the effects of recessions and depressions. He was a proponent of big government spending. The father of modern macroeconomics, Keynes held that the cause of unemployment is a too high rate of savings, or insufficient investment expenditure. Galbraith was a Keynes man, and helped craft LBJ's great social programs in the 1960's. Keynes put forward a theory based upon the notion of aggregate demand to explain variations in the overall level of economic activity, such as were observed in the Great Depression. The total income in a society is defined by the sum of consumption and investment; and in a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment. In short and to grossly generalize, Keynesian theory suggests that one can spend one's way out of a recession.

The opposition to Keynesian thinking were the monetarists, led by Milton Freidman and Frederick Von Hayek. Freidman and other monetarists have consequently argued that Keynesian economics can result in stagflation, the combination of low growth and high inflation that developed economies suffered in the early 1970s. Friedman advocated a central bank policy aimed at keeping the supply and demand for money at equilibrium, as measured by growth in productivity and demand. Volcker and Greenspan were both monetarists.

I heard an interesting show on NPR a few weeks ago where an economist explained that neither of these theories was fail safe. He showed instances where both historically failed, Keynesian theory in the early seventies where we entered into a long secular recession and monetarism most recently when, Federal Interest rates went to practically nil and still could not stimulate market activity. It's all necromancy I guess, Markets move as they will in spite of all of our best efforts. Maybe there needs to be an allowance for a little chaos theory, monitor butterfly flutters in Tokyo or something...

This long boring prologue leads up to a few brief points of summation. It is possible that the world economy has been entirely built on the sybaritic spending habits of we american swine. Japan became a nation of savers and their economy has never recovered, especially when the demand for their exports dropped. Read an interesting New York Times article regarding Japan here.  

Which brings us to the Paradox of thrift.   Too much saving causes economies to suffer. This is one of Keynes tenets. It basically says that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. I steal the following from Wikipedia as I have elsewhere in this dry monologue: This paradox can be explained by analyzing the place, and impact, of increased savings in an economy. If a population saves more money (that is the marginal propensity to save increases across all income levels), then total revenues for companies will decline. This decrease in economic growth means fewer salary increases and perhaps downsizing. Eventually the population's total savings will have remained the same or even declined because of lower incomes and a weaker economy. This paradox is based on the proposition, put forth in Keynesian economics, that many economic downturns are demand based.

If I may summarize, I say do your duty as both American's and global citizens and start spending like a sonofabitch. Your planet needs you to. And once again I say, why give your money to Madoff when you can put a nice little landscape painting over your fireplace that is sure to appreciate?