Tuesday, February 3, 2009

The Paradox of Thrift: 11% GPD Contraction

The following projection is based on solid numbers, but the problem in real life is over-correction. The market never falls directly to the level of fundamental support. We are going through a forced liquidation, that is, from a macro view, irrational. The social chaos engendered by this massive contraction will also be problematic.

...what we had is a society that rewarded those in finance and real estate the most and these folks went out and bought luxury cars, goods, and homes. Thus it was an incestuous cycle. So now, the insanity of it all is that with our negative savings rate, the only way we have to go is back up. Yet you can see the Catch-22 in that we need people consuming to keep demand up. Now let us assume we go back to the historical 62% GDP being consumption. This will suck out of the economy:

$14 trillion x 62% = $8.68 trillion

$10.22 trillion - $8.68 trillion = $1.54 trillion

This is what is meant by the paradox of thrift. If Americans simply revert back to historical savings rates, we are going to eliminate $1.54 trillion from our GDP! That is, GDP will fall by 11%!


No comments: