Economics: An Economic Paradox, Spending Versus Savings

As individuals, we tend to want to save and invest as much money as possible. In a capitalistic system with a semi-market economy, each human being is a free agent, and a participant in some way, shape, or form. One of the few problems with capitalism, unfortunately, is that both good and bad behavior are rewarded; and, good personal behavior done by many is often punished for the group as a whole. Most Macro-Economics 202 students can explain this paradox of saving too much money, and not spending enough. I will also do so now.

The crux of the matter is that consumer spending fuels the American economy. We need dollars to be spent and the turnover velocity of money to be fairly high. If not, products are not being bought and sold, and therefore people are out of work, and unemployment will be high. This goes directly against our inclination of wanting to save money, and act prudently with personal finances. However, all is not lost in this dilemma.

Money saved and invested is equal to business investment. S = I. Whatever America as a whole saves is available to be lent-out to fuel business investment and allow new economic activity and new product development and production. Economists know and understand the multipliers and their various effects. The trade-off is spending versus saving. (Consumption versus Investment) We need both, and there are ideal optimal levels of each to maximize economic activity, and balance or optimize unemployment, inflation, and GDP.

All families want to save, and become wealthy. Unfortunately, although capitalism is the best system on Earth, one family's gain is often another's loss. If you are saving your hard-earned cash, that money is taken out of the flow, except for that capital used for business investment, and bank and broker usage (which can create more money). This money, although there to be invested, will not need to be invested into new business ventures if the people are saving too much and not consuming. (Unemployment will thus rise among neighbors.) On the other hand, if we are spending a lot, we will then also need some level of savings as well to be converted for business investment to keep production up with demand. Thus, the paradox.

More spending eventually requires more savings for business investment and expansion; yet, more investment (savings) is not needed without more spending. But, more savings and investment are required for spending and consumption to continue to increase! Such is our market and capitalistic economy, and one of its truest paradoxes and dilemmas... Sometimes it apparently benefits all for a little less prudence to be employed, unless you are looking a dozen years ahead...


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