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"Wait, Is Savings Good or Bad? The paradox of Thrift"

Please write an article review on "Wait, Is Savings Good or Bad? The paradox of Thrift" which can be found at http://research.stlouisfed.org/pageone-economics/uploads/newsletter/2012/PageOneClassrmEdition0512ParadoxofThrift.pdf

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The article tries to compare savings and its effect on the overall economy, versus spending for consumption purposes, especially as it relates to the current economy which has been upended since the 2007-2008 collapse. Further, it suggests that an abundance of saving could have adverse effects on the economy, because if savings increases, then consumption will decrease thereby adding to the problems associated with economic recovery. Then at the end of the article, it sums up by stating that it may be OK to save more due to the notion that economists are more interested in long-term economic progress versus short term gains.

It may prove useful to understand the difference between saving and consuming. Saving is a method for obtaining and using cash for three primary functions:

* cash is used for transaction purposes --- we need cash (as does any business) for paying bills and acquiring things

* cash is used for investing - allows us to grow our cash position for future needs and/or desires (retirement perhaps?)

* cash is used for contingency purposes --- it is designed to cover unforeseen events such as medical emergencies, personal situations, and the like.

Given the above, and the fact that every business also holds cash for the purposes sated, then it is not out of the question that consumers will "tighten their belts" in an uncertain economy, primarily for insuring there is enough cash on hand to cover their bills (especially with rising prices), and to insure there is some insurance available in the event of an unforeseen event (like a possible layoff or loss of a job). The rule of thumb is to have at least 6 months of cash available for these types of circumstances.

When the economy is tracking very positively, we consumers are usually in full consumption mode and not overly wary of savings. We may, in fact, be more concerned with growing our wealth via investments. And that is precisely what happened, and what contributed to the collapse of the economy in 2007-2008. If memory serves, times were good, unemployment was at a historic low of about 4%, job growth and opportunities were very strong, real estate had forged ahead in terms of value and appreciation of existing inventory. Then we learned that the financial system had pursued many questionable investments which were highly risky and not appropriate for their business model. And the dominoes began to fall.

First, there was a general ...

Solution Summary

The article deals with a discussion as well as a compare/contrast of the fundamentals of savings and consumption relative to to economic realities and need for spending within the economy. It also deals with the implications of government spending, regulation, and need for progressive measures to enhance economic productivity.