Debunking The Paradox of Thrift: Why Consumer Spending Won’t Save Our Economy

by Mark Skousen, Contributing Editor

“America’s saving rate has leaped ahead – and it’s sending America to the poorhouse.” – David Fessler

An Investment U column attacking the virtue of thrift – surely not?

Yet there it was – an article from David Fessler on September 12, entitled, “The Paradox of Thrift: How a Better Savings Rate is Fueling the Recession.”

David Fessler is a friend and smart investment analyst, so I was surprised that he fell for one of the biggest myths in economics today – the so-called “paradox of thrift” that Keynesian economists spout all the time.

Here’s the problem with the theory, plus a few stocks that are front-and-center of the opposite argument…

The Keynesian Way

Let’s start with the facts, as David correctly noted. During the

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Risk aversion has re-entered the investment equation with risky assets such as equities and commodities bearing the brunt of the selling orders, while gold bullion, government bonds, the US dollar and the yen are attracting safe-haven money.

The global stock market pullback seems to be gathering momentum with three markets on my radar screen now trading below their 50-day moving averages, indicating a reversal of the secondary trend. These markets are China, Hong Kong and Chile, with most others uncomfortably close to this intermediate support level (see table below). I am of the opinion that more markets will fall below the 50-day lines and that we will at least see some degree of reversion to the key 200-day moving averages (often used to distinguish between primary bull and bear markets). The table provides the key levels, as well as the declines since the recent highs.

Click here

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How do you like this recovery? Pretty good, huh? Except for the jobs, of course. And except for the retail sales. And except for the foreclosures… and house prices. And incomes. And consumer prices. And business profits. It’s like a female impersonator… just like a real woman in every way, except for the essential ones.

At least stocks are doing well. The Dow rose another 36 points yesterday. In terms of time, it’s already beat the bounce of ’30… it’s in its 6 th month. In terms of stock prices, it’s still a laggard, however. US stocks are up about 45% from their low of 6,547 on the Dow. By that measure, the current reading of 9,398 falls a little short of the 50% increase registered 5 months after the ’29 low.

Yesterday’s news was a big disappointment for mainstream economists. It’s ‘back to the drawing board,’ says the Wall Street Journal.

The

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The biggest financial reform of our generation… The 5 dives headfirst into Obama’s new plan… Stock market sell-off pauses… Wayne Burritt with the next short-term technical target… Dollar dips on new government reform… Chris Mayer on the near certainty of inflation… Paul Van Eden packs some sober advice on gold… Plus, feeling frustrated by the Fed’s free reign? A cause worth supporting, below…

Are we reading this right? The new president wants to give the Federal Reserve… more power?  The very body that’s easy credit policies over the past 15 years helped fulminate the largest speculative bubble in history… could soon oversee nearly every major company in the U.S.?

In a surprisingly brief (for Washington standards) 88-page plan released yesterday, President Obama revealed the first steps toward the biggest financial overhaul since post-Depression reform. We could fill the next five minutes with juicy bits from the plan,

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With investors trying to figure out the most likely direction of stock markets, the US dollar, government bonds, commodities and gold attracted a fair bit of attention - also from the producers of this week’s video footage.

Commentators in the selection below include Josh Rosner, Byron Wein, Stephen Jennings, Paul McCulley, Ed Yardini, Doug Kass and David Rosenberg.

The compilation kicks off with Congressman Alan Grayson uttering some harsh words at The Big Picture Conference - Capitalism After Crisis & Recession, and concludes with a fun ditty - a Wild Life Boogie, AKA The Economy Song.

Yahoo Finance, Tech Ticker: Cost of Fed expansion of balance sheet is $30K per American

“Those were just some of the harsh words Congressman Alan Grayson of Florida had this morning regarding Washington’s handling of the financial crisis so far. His remarks were part of The Big Picture Conference - Capitalism After Crisis &

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The rally has lasted longer than I ever expected. It's good to see the bulls come out, but I'm not joining their party.

After all, the big move has only brought the Dow Jones Industrial Average ($DJI) up to early February levels. How confident were you feeling about the markets 2 months ago? My guess is that you were worried.

But sentiment is better now. Why? There is a belief that we've seen the bottom and the U.S. is moving closer to a recovery.

Certainly, there are signs of improvement. The pace of economic deterioration has slowed. Profits for many companies are not as bad as feared. Even the VIX, a measure of fear, is falling.

On the other hand, we have yet to solve the automotive or bank problems.

Though Larry Kudlow didn't want to hear me bring it up, General Motors (GM) is a

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CNBC news anchors have reached a new high in politicizing daily market reporting. Regular readers of A Dash are well aware of the danger of inferring causation when two events occur simultaneously.  In a market environment where we have intra-day moves of five percent, often with no apparent reason, it is silly to speculate about a gain or loss of 1%. Today's Example It is dangerous to confuse your political views with your investment decisions.  Most financial journalists do not distinguish between analyzing events and offering opinions.  Let us turn to today's example. President Obama was making a speech to the graduating class at a police academy in Columbus, Ohio.  While discussing today's terrible employment numbers, and the total job loss during the recession, he observed that the stimulus package had saved the jobs of this class.  Avoiding impending budget cuts in state and local government was part of the package for a simple ...

November 26, 2008 ndash; For all of the stimulus that the economic chieftains in Washington are recommending, we are disappointed that so much focus has been on stimulating consumption again to get the economy going, as opposed to stimulating savings, which is the real problem, in our opinion. That we were heading into a consumer-led recession was obvious to us a year ago, given the fact that consumers have been straddled with record credit debt and negative personal savings. After all, consumers are the key cog in the economyrsquo;s machine, representing more than 70% of GDP. On August 14, 2007 we wrote: We would also point out that the average U.S. consumers savings are negative ndash; and have been this way for years. The only reason consumers have been able to hold up their share of the GDP has been their credit.nbsp; We have watched in horror each month while ...

Today, Paulson Investment Company announced which companies will be presenting at the upcoming Westergaard Conference to be held November 12, 2008 at the historic Waldorf-Astoria Hotel in New York City. Larry Kudlow, noted economist and host of CNBC’s “Kudlow & Company,” will be the keynote luncheon speaker.

Th Westergaard conference is recognized as the most widely anticipated micro/small cap event of the year. Small and emerging growth companies focused on establishing leadership in a wide range of industry sectors will be featured. This year’s conference will provide a venue for companies to provide detailed insight into their business operations, short and long term growth strategies and industry vision.

This platform will provide MyECheck with an effective way to speak to investors looking for a new high-growth investment opportunity. The company offers online merchants, call centers, billers, retail POS and RDC/back office applications an array of

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Warren Buffett Is Still Riding the Rails As evidence of a bullish long-term outlook for railroads, Warren Buffet's Berskshire recently increased its stake in Burlington Northern (BNI) and the CEO of Kansas City Southern (KSU), Michael Haverty, appeared on Larry Kudlow's show on CNBC Thursday evening, stating that rail transport was showing continued strength in the transport of coal, chemicals, and grains with weakness in the transport of consumer goods and housing related commodities. Berkshire paid $79.65 each to add 825,000 shares of BNI, upping its stake in the railroad to 18.9% or 64.6M shares. The accompanying table presents the ETFI Global Railroad Index, which is a market cap-weighted index of 42 companies with a total return over the ...