Thursday, 15 January 2009

Paradox Of Thrift

So what does this paradox mean?

"The paradox states 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.", according to the economist John Maynard Keynes, writing in the midst of the Great Depression in the 1930s.

That's somehow what we will be witnessing in the months ahead especially as unemployment rise globally.

So who will be replacing the consumers? the government.

The government will build bridges (in Oulu), highway (anywhere), metro etc... So if you are in the construction building thing, you could be OK as the government will try to do anything to fulfill the statistical requirements : The GDP, employment stabilization or growth, in the Keynesian way.
Now the rest, the "service" people, in the best case, if in a well managed company (it's only during hard time when we recognize the competent from the incompetent managers), you will be happy to have your job. in the worst case, the builders will fund your unemployment benefits- it's like a vicious circle that could carry on up to a point.

So it's all about the length -as the feminist movement will tell you.
If the recovery doesn't come quickly, any improvement or government effort will be crushed by another crunch - a bit like a earthquake, the first shock is always followed by a second one, any weak structure will fall afterward.

Right I may sound "doom", fair enough, point taken, but I have to say what we are witnessing is the build-up of 20 years of accumulated issues- like a steamer being heated continuously until it's ready to explode.
After that we will grow in a very "sound" ((c) katainen) basis since the excess, the cheaters, the irrational behaviors will have all but disappeared, the system somehow will have a better foundation - at least in the western world...

How about investment? I think you will be able to invest blindly in almost all sectors as you will be in a position similar to 1932 in the US, or 1992 in Finland. As long as you have been enough "doom" by avoiding to invest in those euphoric times, and not "dumb" to be over-optimistic while the financial world was collapsing in front of your eyes.

I see some ears rising, people wondering about the government actions regarding the amount of fund thrown to the problems - which will undoubtedly increase deficits in the years to come.
So either you will get sharp increase of interest rates on government debts (which will push higher taxes in the future) or higher inflation that will derail the economical recovery.

The idea is that there is nothing such as a free lunch. Same idea as the smiling banker, nothing is coming for free: the population will have to pay sooner than later either in higher indirect taxes or higher interest rates- thus having a variable rate in your housing loan is like having a variable heartbeat -good luck ! (sorry couldn't help my bearishness, somehow it's build-in, I can't disable that ;->)

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