More Frugal Living Hurts the Economy

“One person gives freely, yet gains more; Another withholds what is right, only to become poor.” ~Proverbs 11:24. If everyone lived like me, the world as we know it would end. There would be a major recession, indeed depression. I am extremely frugal. I shop at the cheapest supermarkets. I eat tofu and beans instead of meat. I almost never buy clothes, mainly because relatives keep giving them to me, but when I do, I shop at Kmart, or Big W. I don’t care what people think about what I wear. When I do shop online, I always change from Sort by: Recommended to Sort by: Price (Low to High). I don’t need the supermarket recommending me what to buy. I don’t need expensive cars. Heck, I almost don’t need a cheap car. 95% of my travelling is done on foot. I live within walking distance of almost everything I need. I don’t enjoy shopping and consumerism. I find it boring. I don’t enjoy travelling and tourism. I find it annoying. I don’t like eating out. I find it too expensive. I don’t pay for any subscriptions like Netflix or Disney+. I don’t pay for video games. I don’t drink alcohol. I don’t smoke. I essentially only buy the necessities in my life. I almost don’t have any discretionary spending. When I earn money, I save it. I earn interest in the bank, and earn dividends from the share market. But I have nothing to spend it on. I have nothing to buy. Perhaps some of you can relate to me. Perhaps some of you think I’m crazy. But one thing I know beyond a shadow of a doubt, if everyone did what I did, the economy would collapse.

This is essentially called the Paradox of Thrift. Basically, if everyone stopped spending, then lots of companies would close resulting in massive jobs losses due to nobody buying anything, and then people would have no income and no ability to save. Paradoxically, everyone saving would result in no one saving as no one would have any income to save. My extreme frugality is extremely bad for the economy if everyone does it. Thriftiness would destroy the world. A few of us can get away with it, but the economy needs people to spend all the time. Luckily, it seems like many people can’t help it, and just waste their money as a matter of course, allowing people like me to live our frugal lives.

Independent economist Saul Eslake has commented on this before. He said, “If everyone cut their spending back to the basics, and did it immediately, the result would be an almighty recession — indeed, a depression. The impact would actually be greater than $424 billion or 26% of GDP, because businesses would cut back their investment spending as well, in response to the sudden drop in economic activity and prospects for future sales of their products. And of course there would be significant second-round effects, because people currently employed in providing ‘non-basic’ goods and services would lose their jobs.”

ABC journalist David Taylor who has written extensively on economic matters, also commented, “Things like movie tickets, entertainment — including video games, TVs and iPads — holidays, dining out, furniture, and some types of clothing. So the types of jobs that would go first are department store sales assistants, supply chain workers — the people getting the products to the stores. The hospitality industry would also be hit hard: waiters, chefs, cleaners, bar attendants, actors and musicians.”

Mr Eslake commented on the paradox I mentioned earlier. He said, “This illustrates what famous economist John Maynard Keynes called the Paradox of Thrift. Because one household’s spending is, in effect, another households’ income. If all households try simultaneously to increase their saving by reducing their spending, no-one will be able to increase their saving because everyone will experience a large drop in their incomes.”

Mr Taylor commented on people’s savings, “Deposits act as a nice bit of insulation for the economy. While they do facilitate lending, economists view savings as a ‘leakage’ of money out of the economy.”

So what is one to do? If everyone saving too much is bad, what should the average Joe do with their money? Mr Eslake concludes, “As a general proposition, it is a good idea for people to save a bit of their income if they can. Starting early, and saving a consistent amount over a long period, can produce big returns. On the other hand… if everyone tries to increase their saving all at once, the result will be bad for almost everyone.”

So basically, the world needs people to spend. I’m pretty sure there’s no shortage of people who are happy to do that. But people like me, people who are almost philosophically against wasting money will probably just continue doing what we do. Sure, the world would collapse if everyone was like me, but everyone isn’t like me. There’s plenty of people out there willing to work long hours and buy expensive cars while I sip on my green tea and eat tofu and beans.

#frugalliving #frugality #savingmoney

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