To counter the argument that inflationary policies are destructive in the long run, John Maynard Keynes famously quipped that “in the long run, we will all be dead.” Unfortunately, the only person who will not die is Keynes and his disastrous economic theories. An article recently appeared on the front page of the Wall Street Journal entitled Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes immediately implying the utterly absurd notion that "savings" somehow hurts the economy. Quoting the article:
Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."
Of course, this is hardly a "paradox." When someone goes to the bank for a loan to buy a house, a car, etc. where does the money come from for this loan? So spending on anything other than inexpensive consumer items like soap and shampoo depends largely on the savings of others. Second, savings provides the capital necessary to fund productive expenditures which of course lead to greater productivity, increased real wages, and consequently higher living standards.
The catastrophic boom bust cycle which creates the phenomena discussed in the article is caused by government led credit expansion. In the "boom" phase, the government does everything in its power to decrease saving primarily by inducing illiquidity, i.e., as prices rise and credit is widely and easily available, firms and consumers tend to hold smaller cash balances. This induces individuals to consume as opposed to save (see the chart in the WSJ article of changes in personal consumption) and creates malinvestment throughout the economy as capital flows to businesses that momentarily appear to be profitable. When the supply of new money is subsequently reduced by the government (mostly to avoid hyperinflation) many businesses will fail as consumers stop spending money and retrench, i.e., are forced to rebuild their liquidity. In the short run, as the economy contracts in the wake of a bust it is true that many businesses will fail. But this effect is not caused by savings. It is caused by government credit expansion which led to over consumption and malinvestment in the first place. Ironically, it is savings that will come to the rescue. During a recession, as firms and individuals rebuild their liquidity (by saving more and spending less) prices and wages decline, profitability is restored and real wages can begin to increase.
We have been down the road of consumption vs. savings before (see my previous post Production and the Primacy of Existence.) Note that Dr. Reisman specifically addresses Keynes and the "paradox of thrift" in his treatise Capitalism in Chapter 18 “Keynesianism: A Critique” specifically in Section 3 Critique of the “Paradox of Thrift” Doctrine p. 884. In this section, he discusses the more general argument but also refutes some more technical arguments that would appeal more to advanced students of economics.
Finally, for entertainment and educational value read the following research report published in November of 1934 by the American Institute for Economic Research. It could have been written yesterday. See especially the authors sarcastic reference to America's "unofficial English advisor, Dr. John Maynard Keynes." All of their reports are archived here. It's amazing how little has changed or been learned in the economics profession in 80 years.