Paradox of Thrift : Macroeconomics

While each of us may have different to save money out of our regular income ( typically salary for the employees, monthly profits for neighbour kirana store and so on) , it is no doubt the primary reason is to secure our future against unforseen events. and Most of us save money in the form of Stocks, bonds,NSCs and of course some money is stored in banks etc for the lure of interests ....Have you ever wondered wat happens to the money which stashed in these bonds and NSCs and banks ( leaving aside stocks as they fall under different category of Risk driven savings)

While here starts the intriguing story of the money. The money you save in the banks is the money which is used by banks to lend out to investors and industrialist. The same money is used by the government to invest and pay for short term debts !!!!!!! ...The basis assumption of course is that of all the money which is kept by individual investors in banks, everybody will not withdraw the cash in one go. If that happens ( remember ICICI bank going bankrupt rumour a couple of yrs back) ....... then the banks are in for a liquidity crises and will run out of cash to pay it's own employees.

Now what happens if the ordinary people don't save and instead spend all the money which they get from regular income ? ..This is a really good ecomomic sign and helps the economy become a demand market and increases growth rate. At the same time, it implies that this growth cannot be funded with the domestic investments and for growth we will need to be now dependent on External Inflows ( the FDIs ) ........So one hand, less savings is better for the economy .. on the other hand it makes the country dependent on external flows to fund this growth ..........( the classic is that of the US economy ) This is commonly known as the "paradox of Thrift !!!!!!!!!"...

PS : Sorry if I am sounding like a economic prof ...