New column: The paradox of thrift

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I have a column online and in the issue of TIME with faith healing on the cover. It begins:

Don’t spend more than you make. Don’t buy things you don’t need. Save for a rainy day. If Americans had followed these simple rules over the past decade, there would be no financial crisis, no worst-since-the-1930s recession, no acrimonious Washington debate over what to do about it.

Now we seem to be starting to rediscover thrift. Debt levels are falling. Consumer spending is down. The savings rate is on the rise. Great, right? Not exactly. The sudden sobering up of the American consumer happens to be the No. 1 force driving the U.S. and global economies downward. We’re saving more, yet we’re all getting poorer.

This is what some economists call the paradox of thrift. The notion is generally credited to Englishman John Maynard Keynes–seemingly the source of every important economic idea these days–although he doesn’t appear to have actually used the phrase. Paul McCulley, an economist and portfolio manager at bond giant Pimco, defines it like this: “If we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income–the fountain from which savings flow.” Read more.