Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
I, a lowly construction estimator, with merely an engineering degree, will now solve the so-called "paradox of thrift."
When people run out of money, when people run out of credit, they begin to save money, to pay down debt, in order to reach their own personal financial equilibria.
When the government, on the other hand, runs out of money, they simply create more money either inflating the dollar or borrowing more, in the knowledge that they will eventually gain it back by raising taxes.
But, unlike the normal person, the lowly engineer, the autoworker or the ditch-digger, the government does not reign in its spending. Rather it attempts, as we are seeing now, to spend more, while attempting to collect the same amount of revenue.
Unfortunately, when people lose their jobs, or when companies go out of business, the immediate solution is to cut taxes, to allow those businesses to continue to be in business, and subsequently to continue contributing to the government's incoming cash flow. Simultaneously, if government would act like a normal human being, rather than some fictional monstrosity, and cut its spending, the revenue stream would ultimately override the spending, and the government would find itself with a balanced budget rather than an historic deficit.
Instead, they spend in order to "cushion the blow" to the economy. They spend obscene amounts of money, and wait out a recession that would have taken care of itself by correctly cutting everyones taxes, at which point they raise taxes to attempt to recoup their previously lost revenues.
There is no "paradox of thrift" in the economy.
There is only the government's Reality of Theft.
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