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31/08/2009 -
For consumers hit with debt during a recession, increasing saving and reducing spending seems to be the logical response.However, according to Arthur Donner - an economic consultant, formerly chief economist at Toronto-Dominion Bank - this response can hurt both businesses and those very same consumers.
This is because deleveraging, which is the rapid reduction of debt, triggers the "paradox of thrift," Donner wrote in a recent article for The Globe and Mail. According to the paradox, which was coined by John Maynard Keynes, increased spending on a large scale leads to lower demand and consequently lower economic activity.
The rising personal savings rate indicates that the paradox of thrift may be at work right now - the savings rate of 4.5 percent in the second quarter of 2009 is significantly higher than the 0.8 percent seen in February 2008, according to Statistics Canada.
To combat this phenomenon, Donner urges consumers to put aside their fear and pick up their wallets, as it will benefit the economy as a whole.
Donner's readers may have been paying attention, as the latest data from Statistics Canada showed that personal consumption expenditures rose by 0.4 percent in the second quarter of 2009.
To stay on top of what is expected to be the continued rise in spending, businesses should make sure they accept all types of payment cards, to avoid having to turn away any customers. Especially as the focus on financial conservatism will likely linger even after spending resumes, accepting debit cards will be a particularly important concern for merchants.
