If you are deciding to save rather than spend, you are still reducing aggregate demand – some of the money you leave in the bank will be lent out, but a significant portion will not.

Rimaye, you have conflated two separate comments of mine to serve your argument. The statement I made about technological innovation and falling prices had nothing to do with deflation. That 1st statement was in regards to people’s *behavior* during falling prices of a particular sub-set of goods in the technology sector. When I said in the 2nd comment “If you think deflation is bad, consider what INFLATION does to an economy”, I was simply saying that I view rampant inflation as a far worse ill than deflation. This was an EXAMPLE against the paradox of thrift, not an observation or transition from the previous comment about technological innovation.

I did *not* say that the reason for falling prices for computers was from deflation; I said that people respond to falling prices in the computer industry by *continuing to buy*.

This is why the connotation of deflation with “falling prices” creates such false notions as the “paradox of thrift”. People’s behavior in the Great Depression was influenced far more by the government’s failed attempts to “fix” the economy than by falling prices. See my link in my previous message (#29) for evidence of this as well as http://mises.org/books/deflationandliberty.pdf

Instead, if you define deflation as a “decrease in the money supply”, then you integrate deflation with people’s behavior *IN REAL LIFE* and see that deflation is a natural and necessary consequence of the un-natural pumping of the money supply that the Fed has engaged in.

Oh, and Nate (comment #11)… “temporarily running a deficit”? Do you really believe that this is temporary? The current govt. deficit is nearly $12 trillion… the responses of the govt. to the current financial crisis is to obligate over $10 trillion today and for the future… the govt’s obligations to the American people are already over $50 trillion. How is *any* of this insanity in *any* way temporary?

In what way am I not fairly presenting the idea? Because I’m not addressing Adam, who starts off saying “You seem to be misunderstanding basic economics.” and then immediately says “When demand for goods falls, the quantity of goods purchased falls at every price point” … uh, what? In what universe is that true? Take commodity prices, for one.

Sorry, I don’t dance with trolls.

The only Mises fan who goes beyond “OMG! Keynes is a bad man!” is Eido Cohen (#29), and his logic demonstrates that he has no grasp of basic economics. Technological innovation is not the same thing as deflation. His argument about computer prices would only be correct if manufacturing efficiency were constant. Unfortunately, however, the fact that computer prices are constantly falling has to do with huge gains in efficiency, not deflation. For those who may not know the definition of deflation, it’s when prices of the same goods decline over a period of time, all else being equal. The key terms being “the same” and “all else being equal” – same product, same manufacturing process.

Everyone else may have learned their lesson and be tightening their wallet, but my brother and sister-in-law are hell bent on saving the economy all on their own. They most definitely cannot afford it, but they have gone into a frenzied deficit spending mode. It’s nothing new, but it’s actually increased as the economy has worsened. It blows my mind.

If your ethics are about the long term, then being responsible (saving for a rainy day) and the long term economy are always aligned very well.

Even avid savers need products and services. They still have to buy that new car when the old one dies. They still need the new washing machine when it gets too expensive to fix the old one.

When they do spend the money goes to the the vendor without a lot of $ going to a credit card company. A higher percentage of their income go into businesses providing services or products instead of creditors. In fact most savers will end up spending MORE than they earn as job income because they will be getting interest income as well.

So being a saver may be bad for credit card and consumer loan companies to a point, but how can it be bad for the economy?

When demand falls below the ability of our economy to produce there is little incentive for industry to borrow money to increase production. Businessed can’t produce their way out of slack demand by customers.

Slack demand caused prices to fall. Falling prices is called deflation. Deflation is devastating for an economy because consumers soon figure out that its better to wait for prices to fall further before making purchases. So, when prices fall, demand actually falls with it, and an economic depression ensues.

This is why, during this kind of recession, it is critical that the government take advantage of cheap available credit to borrow and spend money to increase demand to prevent an economic depression.

Really, there’s nothing that will get through until you get yourself a better economics education. Read better books!

You might point out that books specializing in economics are rare before the Renaissance. That’s correct, and there is a good reason for it. Learning that reason will help you understand this better.

If we become a nation of savers again, we will have more disposable income and spend MORE money in the long-term. It could take 5 or 10 years to see the results, but it will have a lasting effect for multiple generations.

Just the same, I do like this post because it sort of explodes some myths.

Our entire system is built on the idea that people acting in their own self-interest, help everyone. You’ve demonstrated how true that is.

Well done.

Don’t listen to anything Keynes said. It’s all B.S. Read the articles from MISES dot ORG to enlighten yourself.

I’m not affiliated with that site in anyway, other than wanting SERIOUS change in our society.

Consumers don’t cause recessions, corrupt central bankers and corrupt governments do.

The painful truth is that the only way for the economy to regain the losses of the recession any time soon would be through another bubble caused by spending based on debt.

The only people I would encourage to spend money right now to stimulate the economy would be the fortunate few who have secure jobs, no debt, and savings. It might help if people like that would open their wallets a bit and be less frugal than they normally would.

Read the Mises article which shows why thrift is not paradoxical. While there, please read the other articles which tell you the truth about our economy and governments. No, this is not some tinfoil hat paranoia. Read the articles and you’ll see.

http://mises.org/story/3194

In case links are stripped out, go to:

MISES dot ORG slash STORY slash 3194