When saving becomes dissaving

Paul Krugman on the new, new Paradox of Thrift:

Yesterday's report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy.

I don't know who else has made this point, but it's quite clear that we're in serious paradox of thrift territory here. Or perhaps more accurately, we're in a paradox of debt.

Consumers are pulling back because they've realized that they're too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can't do this accurately until the Federal Reserve's flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

What does this mean for the stimulative effects of tax cuts, transfer payments, or any other kind of government spending?  What does it mean for the savings rate--savings could conceivably go up as a fraction of income at the same time it goes down in absolute terms. I don't know--I'm not even sure how we could know.  Has any other country ever had this level of personal debt before?