The Paradox of Thrift and Economic Policy

Saving money actually ruins the economy. It is called the paradox of thrift because if everyone

decides to save at once, aggregate demand crashes and total income drops for

everyone. That is exactly why the government steps in with fiscal policy.

They pump cash into the system using the multiplier effect, proving that direct spending hits the

economy harder than tax cuts. Meanwhile, the Fed manipulates interest rates and

the money supply to keep cash flowing. But there is a catch. If the government spends too much

when we are at full capacity, it raises rates and kills private investment,

crowding out the actual growth we needed.