Penny pinching paradox -- take two

Even as consumers are starting to save, their indebtedness is likely rising

By Andrew Leonard

Published February 3, 2009 8:03PM (EST)

Paul Krugman adds a disconcerting note of analysis to the phenomenon I wrote about on Monday -- the paradox in which the sharp rise in savings rates precipitated by Americans worried about their economic future is actually worsening the economic downturn.

Consumers are pulling back because they've realized that they're too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can't do this accurately until the Federal Reserve's flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

In other words, even as consumers slam on the spending brakes, they are speeding ever faster into deeper debt. Wonderful.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Globalization Great Recession How The World Works Paul Krugman U.s. Economy