‘A penny saved is a penny earned’ is a well-known proverb which we all must have heard and decoded by now. We conclude that it is important to save money. But, is a penny saved really a penny earned?
If all the people, as a whole, try to save more, that too, in hard times (or in times of economic slowdown), what would be the consequences? A surprising anomaly arises when all the people in a society try to save more and spend less.
The world market is gradually coming back to life again, but there isn’t enough life in it yet. People are still in trauma due to the havoc caused by Covid-19. Common people are becoming thrifty, businesspeople and companies are afraid to invest.
They are prioritising saving and this idea of theirs could turn out to be the best for now, at individual levels. But, what if we all start thinking alike? It will lead to no life in the markets even after them being alive. The reason could be our “same thinking”: to save as much as we can.
This attempt of ours (to save more for hard times in hard times) means that we as a society may not end up with the same savings, but also, in the process, cause consumption, investment, and standard of living to decline. It is almost an open invitation to diseases like depression.
This attempt, especially in hard times, may actually worsen the economic crisis and cause output to fall, unemployment to increase, and prices to rise. This thriftiness will lower the aggregate demand for goods and services, resulting in a sharp drop in the levels of income.
At lower income levels, the saving falls to the original level, but consumption will be lesser than before. This indicates that people will become worse off. It is not possible for all individuals to simultaneously save any given sum.
This attempt to win is a self-defeating one. According to me, the truth is quite simple: prosperity depends on productivity. If everyone becomes thriftier, we all become less wealthy.
P.s. it is okay to save during times of prosperity, but saving during hard times can lead us to further dark times.