J.M. Keynes talked about the “paradox of thrift”-meaning that, if everybody saved a big percentage of their incomes (and bough very little), the economy would go into recession. This was because as demand dropped, prices would fall, and also profits. The economy would drop to a new equilibrium, with lower employment, which would trigger higher savings-effectively a recession.
Is this a reasonable aalysis? You could just as well posit that falling prices would trigger a jump in consumption.
If everyone, all at once, began buying fewer goods and services, a recession would indeed be the result.
On the upside, anthropogenic carbon production would diminish substantially since it is fundamentally related to consumption.
**You could just as well posit that falling prices would trigger a jump in consumption. **
Exactly. Economies have self-correcting mechanisms. Although one of the problems with deflation is that consumers will often keep waiting if prices are falling to see if they’ll fall further. Another reason deflation is evil is that it makes investment kind of pointless. The only thing worth doing in a deflationary economy is to pay off debts and if you don’t have debt, hold on to cash.
But in the real world, universal thrift doesn’t happen except in a case like now where the economy is overleveraged. In that case, we need universal thrift, as much as it hurts, because people need to get out from under their debt loads.