Truth, Contradiction and the Paradox of Thrift

What I Think #5

Truth, Contradiction and the Paradox of Thrift

# 005 March 5, 2009

Amazing things are happening all over. I know the economy is in a shambles and a lot of people think the world is going to “hell in a hand basket”. However, in many ways I’m excited… you ask, “how can you be excited in times like these?” I can be excited because with every failure is a new birth. Things will change, things will eventually get better; it will take time and it may take more time than we think we have, but things will change nonetheless. Now is the beginning of new opportunities and new ideas. The old dies, the new is born. Our attitude greatly affects what we do and where we end up.

We have a new president with 80% approval ratings. Not bad for a one term Senator that has been in office less than two months. President Obama ran on a platform of change… no one should ever question that statement. He made his platform very clear – he will change the status quo. I believe he will. He has already started. Let’s hope he has the guts to come clean with the American public and give us a true assessment of what is happening in our economy and not just feel good messages. Whether you believe his policies are good or bad for the republic, he is our president, duly elected and now in charge.

The question of the day is, “Is President Obama’s quest for change a positive change for the long term health of the American republic?”

This is the question that is being debated far and wide. Regardless of the answer to the question, the American people appreciate the fact that we have a “new” president with “new” ideas and a “new” outlook. In reality, all this newness may be the same tired old statist non sense, or it may be a truly game changing administration. It is up to the American public to look at what is going on and decide for themselves if this truly is change or if it is not…

Too often we accept what the pundits, spinmeisters and pollsters tell us. It is time for the American people to take a few minutes and ponder the facts of our current political and economic situation:

How did we get where we are right now?

What have we done right (or wrong)?

Where are we going?

Are we going to like where we end up?

These questions are extremely important. How often do we ask these questions to ourselves about our own lives? If you think the answer is “rarely”, then do you think we will honestly ask these questions in a public forum that will require debate (and possibly sacrifice)? What must be done to wake the American people to the question, “What is the logical, long term result of our actions?”

Here’s an interesting oddity, Sweden, a heavily socialist country said NO to Saab when it requested a bailout from the country’s Prime Minister! He explained, “Voters did not pick me to buy into loss-making car factories.” It’s a shame we can’t show that kind of pragmatism in the good ole’ U.S.

What a time of paradoxes we live in… the [supposedly] free market U.S. is bailing out every failed business and their brothers, yet socialist Sweden says no! Up is down, down is up. We are certainly living in a time of contradictions. Tomorrow the jobless numbers for February will be announced and the numbers are “dire”. By the same token, the savings rate has jumped from zero (last spring) to 5% maybe more! That is incredible, but the economist say, not so good for the economy! By saving more, we are not helping the economy. 70% of our economy is consumer spending, so a 5% increase in the savings rate equals a 5% drop in the economy… oops! This is called the “paradox of thrift”.

“The paradox of thrift refers to how--in the Keynesian model of the economy--an increase in saving reduces production and employment. This supposedly occurs because a decrease in spending leads to a decrease in employment, which leads to a further decrease in spending, which leads to a further decrease in employment, which leads to a yet further decrease in spending, and so on. Thus, if people try to increase their saving, there will supposedly be a decrease in spending, and a fall in employment and production. Furthermore, as a result of the interaction of what the Keynesians call the "multiplier" and what they call the "accelerator," an increase of intended saving supposedly may result in a decrease in actual saving.

The paradox of thrift simply took Keynesian economics to its illogical conclusion. If governments should increase their spending during recessions, why should not households? If there were no principles of "sound finance" for public finance, from where would such principles come for family finance? Eat, drink and be merry, for in the long-run we are all dead.”
(excerpted from The CATO Institute, “The Paradox of Thrift”)

http://www.cato.org/pubs/journal/cj16n1-7.html

Seems kind of contradictory, doesn’t it? One thing I’ve learned in this life… people cannot live with contradiction, at least not for very long. The natural response to contradiction is first - disbelief, then confusion leading to distrust, then anger leading to animosity. It is very difficult for a relationship to recover from animosity. Once a person or group reaches the stage of animosity, it is virtually impossible to redeem the trust needed to restore the relationship. Is this where we are headed as a country?

I’m concerned:
We have major droughts in California, Argentina and Australia… why does this matter? These are three of the most productive farming areas in the world. This is happening on top of capital shortages in these three locations… what may happen to our food production? Planting season in the U.S. is almost upon us. Farmers may not have the ability to tap into the credit markets as they have in the past. What happens if they can’t get enough money to plant all their acreage, on top of not having enough water to irrigate their crops?

I think we can survive anything except food shortages… pray that does not happen!

With warmth and regards (as always),
Allen
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