Remember just a few years ago when the economy was expanding rapidly? Savings rates were negative. Households were spending more than their incomes and making up the difference by borrowing.
But now savings rates are high and credit card debt is being paid down (a form of savings) because the economy is contracting, or at least not growing. And that is just what the Savings Paradox predicts.
The best interests of the economy now would be served if everyone stopped saving and went on a spending spree. Consumer spending drives about 70% of the entire U.S. economy, and small businesses are in a world of hurt now because their businesses don't have enough customers, and therefore cash flow. Which, of course, is why they aren't hiring new employees.
But this brings us to the dumb ass part of Washington. Bush sent everyone $500 checks to revive the economy. 84% of those checks went into savings. Then Obama reduced the amount that is withheld from your paycheck, and that all went into savings. So here is the dumb ass part. The new Jobs bill repeats the failure to understand the Savings Paradox. (Doesn't any of his economic advisers remember the Savings Paradox?) He is going to reduce your contribution to SS by about $100 a month, a trivial amount. And if you are among the 15 million without jobs, you don't even get that. Or if you are among the 15 million under employed, it will be an even more trivial amount.
So the money that small businesses need to grow goes directly into the bank, and does absolutely nothing to revive the economy. Read what the Los Angeles Times says the banks are doing with that money. Dumb ass may too generous a description.
Bank deposits soar despite rock-bottom interest rates
Consumers worried about the economy are pumping cash into checking, savings and money market accounts. But the banks don't need their money and have slashed interest rates to discourage customers.By E. Scott Reckard, Los Angeles Times
6:08 PM PDT, September 17, 2011
There's no sign that the flood into checking, savings and money market accounts is slowing down. In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year.
There's one big problem: Banks don't want your money.
"Banks and credit unions are doing everything they can to get rid of the cash except make loans," said Mike Moebs, a Lake Bluff, Ill., banking consultant.
He said banks are driving away deposits by refusing to renew CDs at higher rates and by imposing fees on checking accounts for depositors who don't use other, profitable financial services as well."
There is more in today's Business Section if you are interested.