Savings, meanwhile, is on the march: personal saving rose to 5% in January. As Paul Krugman notes, that means that in the short run we can expect the economic contraction to continue, especially since banks aren't doing much to transform the savings into new investment (in part because businesses aren't much interested in investing in new productive capacity while demand is slumping). The personal savings rate isn't even particularly high right now by historical or international standards--something closer to 8-10% would be more in line with everything except very recent history.
There is a lot of talk about the paradox of thrift out there, including from Krugman. But just as I think the time has passed for attempting to cure the banking system's problems by pretending they'll get better if we just
Given that savings are probably going to increase to something closer to 10%, what does that mean for policy? Well, for starters, it has big implications for our predictions for stimulus multipliers. The money going directly to highly budget-constrained people will be spent--unemployment benefits, for example. But much of the rest of it will be saved because our marginal propensity to save just radically shifted.
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