The Paradox Of Thrift And The Wonders Of Consumption
If you spend any time around the personal finance “blog-o-sphere”, you’re bound to encounter dozens if not hundreds of articles extolling the virtues of spending less and saving more. You’re also likely to have heard the message that “anybody can reach Financial Independence” if they really put their mind to it (and save 50% or more of their income).
Lately though, I’ve started to change my mind about some of these core messages that get parroted around the blog-universe, like so many birds repeating the same song the other birds sing…
Maybe we’ve been banging on that savings drum a little too hard. And maybe, (just maybe) we *shouldn’t* be saying Financial Independence is for everyone.
Perhaps we should be sending the message that financial independence is only for super-frugal weirdos that deprive ourselves of all the fun things in life.
What?!? Why would we want to send such a message?
The Paradox Of Thrift of course!
The Paradox Of Thrift
The Paradox of Thrift is this funky concept from economics that states — If we all choose to save more on a national or global level, aggregate demand actually decreases, which will in turn will lower total savings, not increase it!
Confused yet? I didn’t make this up. Some of the smartest economists in the world (John Maynard Keynes) came up with the idea.
If you think about it, it makes perfect sense — Everyone has a savings rate intrinsic to themselves, their culture, and their lifestyle. But if we think about savings on a nation-wide level (or global level), choosing to save a larger percentage of the total income that means less money is moving into the economy which means lower corporate earnings, smaller dividends and fewer jobs available for people to earn and save.
(For simplicity’s sake here, just assume savings are held in cash)
Meaning, we need to keep spending as much as possible in order to keep the economy going! If we don’t, our collective savings rates will rise, and the economy will suffer! This means stock prices in our retirement accounts would suffer too!
This paradox of saving makes me a bit worried because the U.S. savings rate has been on the increase for some time:
As of August 2019, the household savings rate in the U.S. is 8.1%, which is up pretty significantly from the record all-time low of 2.2% set back in June of 2005. There have been a few blips over the past decade, but generally the U.S. savings rate has been improving — Americans have been choosing to save more.
Clearly personal finance bloggers have been doing our jobs too well! We want people to spend more, not less! The economy needs more fuel!
Just imagine if the average savings rate in the U.S. was half of what it was today — That’s A TON more money being put into the economy that would drive profits higher and in-turn drive stock prices higher. Interest rates would also be higher (because of less money sitting in bank accounts), but so would dividends and bond yields as a result.
Big savers (like you and me), would do even better in a situation like this when everyone is spending more in aggregate. In other words: It’s good to be a saver, but it’s even better to be a saver when everyone else isn’t.
Consumption Is Wonderful
So I think I need to change my message here a little… I’ve been going about this whole Life thing all wrong you see. I’ve been denying myself all the wonderful happiness that can be derived from consumption! Learn from my mistakes! There’s just no real point in trying to save so much!
We should be out there spending and consuming as much as possible — in order to maximizing our happiness during our short time on this world. Life is short. Enjoy it while you can!
For example — There’s some really nice new cell phones coming out this fall that look super amazing. You should definitely pick one up so that when you’re sitting in that trendy coffee shop sipping your cold-brewed pumpkin spice mocha, YOU can look super cool.
While we’re at it, I need to mention that your 3 year old car isn’t looking as nice anymore. Hell, the dealership isn’t giving you free oil changes anymore so it’s practically time to trade-in that maintenance monster. This time around, maybe you should upgrade to something more luxurious…something larger and something more German. Like a Mercedes GLS, a BMW X5, or an Audi Q7. Those are really nice premium cars that’ll make you feel good and look good while driving them. Efficient little Japanese cars are for chumps and frugal weirdos.
Don’t have the cash for these things? Interest rates are super-low right now! Just borrow the money and you’ll be able to easily pay it back with your ever-growing salary. No problem!
Now, what about all this cooking at home stuff? Psshhaw! Cooking at home is for poor people with no lives who like to eat terrible food! Don’t eat beans and rice! Tofu is for weirdos! You should be eating at an exciting new restaurant every night of the week! Why waste your life cooking and cleaning when you can enjoy the fruits of your labor by eating a scrumptious meal made by a wonderful chef!
Oh, and speaking of homes — Buy as much home as you can! Having a ton of space is comfortable, and a bigger house is going to see that much more appreciation when time passes.
Spend it all! Right?
Final Thoughts
OK, OK, I’m only kidding! I don’t really believe people should be spending every last dollar. Saving and living within your means is a very good thing. But given what the Paradox Of Thrift tells us, is there such a thing as too much savings?
To a certain extent economies can run perfectly well on a whole range of savings rates, anywhere 0% to 50%. Globally we have countries (and economies) that function perfectly well within this entire spectrum of savings rates, so there’s really no need to try and trick people into spending more (or less).
History has also shown us that it’s also NOT a problem if the national savings rate moves-up a few percentage points over a decade like we’ve experienced in the United States.
For all those folks still seeking financial independence, you simply have to save more than whatever the average consumer saves. That shouldn’t be too terribly hard given the low savings rates in the United States or other parts of the world.
That said, promoting the idea of everyone reaching FI by saving 50% or more, doesn’t sound realistic to me. If everyone suddenly started saving 50% or more, it would put a huge dent in the economy! A recession (or depression) like that might take years or even decades to recover from. We don’t want that!
What we really want is a nice smooth-running economy with plenty of stable jobs, low unemployment, good education and social services, and plenty of excess money to invest in innovation. I think we’re pretty close to that ideal today.
And for all the frugal weirdos out there like me — Yes, we should definitely have the opportunity to save and invest our way to financial independence by saving large percentages of our income.
But let’s not kid ourselves and pretend everyone should be doing it, OK?
[Image Credit: Flickr]
As you probably know, MMM posted about this a long time ago. I mostly agree with his opinion as to what would happen.
It doesn’t matter, there’s no chance of us finding out 🙂
🙂 I wasn’t aware of his post, but thanks for the note. I’ll check it out.
I wouldn’t lose sleep over it. 99% of the people aren’t going to change their saving habit because of PF bloggers. Saving rate is up slightly because everyone is doing well. I’m sure it will revert to means at some point. Around 5%, right?
Interestingly, Chinese people has a very high savings rate. I think in the 30s. They’re still driving the economies around Asia. Chinese tourists spend a ton of money in Thailand. They buy a lot more stuff than other tourists according to the people I talked to. Europeans and Americans are cheap compare to Chinese tourists. They bring loads of stuff home.
Well, historically U.S. savings rates have been much higher. I think over the long term it’s averaged over 10%. Only in recent decades has the U.S. become more spendthrift.
I used to know this college professor that had a theory about China’s extremely high savings rate — It’s partly historical, due to starvation times during the Mao era people learned to save, and partly because the country lacks many of the social safety-nets we take for granted in the Western world.
My personal opinion is that countries like Switzerland, Norway, and Sweden (and other Nordic countries) have a good balance of personal savings rates, high incomes, and plenty of social safety nets.
That kind of financial stability is bound to be good for society.
Love the title of this post!
I’m reading this in the morning, with my coffee only half drunk. Must be the reason why I read your sentence about the car as, “I need to mention that your 3 year old isn’t looking as nice anymore.”
Had to go back and read that again – it’s a very pointed comment to make about someone’s child!!!!
Haha! I guess I could have worded that a little better. Thanks Frogdancer Jones! 🙂
Is this a reverse psychology article? I’d hate to hear your words about my car since it was already 6 years old when I bought it a couple of years ago. For those of you going to follow Mr. Tako’s advice and go buy a new car, I hear they now offer 8 year payment plans on cars. That just seems crazy to me. Financial Independence really isn’t about savings, its about creating unearned income. Now, most do it by having a good paying job, save a huge percentage of their income, and invest it to get the unearned income they need to be financially independent. There are other ways. Some will use rental properties and others have become entrepreneurs (starting a business) to get there. Often they will sell these later on and put the money in stocks so there is even less work for the income. Most blogs talk only about the savings, and tend to glance over the other things they did to get to F.I. I do agree that most people are not wired for saving. This worries me with my daughters. My oldest is a saver, but I haven’t figured out how to get money to stop burning a hole through my youngest daughter’s pocket. But I’ll keep working at it.
Good luck Robbie! Hope your daughters learn to be good savers!
I think the shift to a more frugal lifestyle by the mainstream will be better for everyone overall. Slowing down the economy and voluntarily leaving the workforce early are good for reducing the impact of the global trends running out the planet’s finite resources and the automating of jobs (or increasing productivity). There is less overall stress on everyone with a slower lifestyle backed up with a healthy investment account, even it the investment returns aren’t what they are now. Many folks such as you have overshot your investment needs and those will continue to snowball. Frugal folks are more resourceful and less susceptable to outside forces. The nature of cultural change is slow, but I think a long term shift toward full frugality and healthy savings is a good goal that can be sustained if done in an orderly manner. I like the freedom of FIRE, but I’m also strongly motivated by the reduced planetary impact of frugal living and FIRE.
Indeed, living a lower impact life is one of the major benefits of consuming less.
I’ve noticed in my own life ever since I reached Financial Independence that my impact on the planet is much lower.
I think I should write a blog post about that!
I’ve been telling all my friends and family to increase their savings rates, and nothing has changed. I think most people are not going to change their inherent spending, family norms, and minimum level just because someone said they could retire early from it.
I think it’s great that we are able to have a high savings rate and take advantage of that. At the same time, I wonder how many other people can benefit from adopting some of these more frugal ways. For example, excess consumption leads to more waste and an overproduction of things like fruit, vegetables, clothes, electronics, even meats that eventually goes bad and gets thrown away.
Overall, excess consumption has a negative affect on more than just someone’s wallet or bank account. Despite knowing this, lots of people don’t change. So I definitely agree with you, it’s not for everyone. It’d be nice if it was…but I would like to enjoy being a better saver when other people aren’t.
THe younger me who got a BBA in Economics really appreciates this nerd fest. Gogogogogogo!