Thrift Hazard and Moral Paradox

Thrift can be a hazard. Who knew?

If everyone saves and no one spends, the economy stalls.

If everyone spends and no one saves, the economy booms, then crashes.

   Economic textbooks teach about the Paradox of Thrift and Moral Hazard, and each can have a negative impact on a nation's economic health. But when they work together, the effects are like compound interest -- a very powerful force.
   Excessive thrift can be a hazard because consumers refuse to spend, thus diverting the flow of money to savings institutions in the hope of increasing their personal wealth. But money must flow to keep an economy healthy, and as the flow is diverted or slows, so does the national economy.
   By the same measure, excess spending causes too much debt, and eventually consumers realize they must pay down their debts, and consumption -- in turn the overall economy -- stalls.
   Moral Hazard comes into play when company executives, in particular, know that no matter the risk, someone else will be available to bail them out if their investment fails. It can be a paradox when, under the guise of morality, they indulge in practices that can harm others regardless of whether the project is a success or a failure. All that really matters is profit.
   In the end, the health of an economy depends on the flow of money, or velocity, in econospeak, as well as the quantity of it. Too much supply, and inflation results. Too little, and consumers cannot buy. As for velocity, if it moves too quickly, the public is swamped and prices rise. If too slowly, buyers must wait longer between purchases.
   Some expansion of the money supply is needed to ensure growth of an economy. The problem lies in deciding how much money growth (inflation) is enough without causing excess inflation, or rising prices.
The latest euphemism from the Federal Reserve is "quantitative easing," which really means expanding the money supply in an effort to boost economic growth. Ideally, slow growth is better. Rapid growth can outpace the availability of resources (land, labor and capital), and push up prices too quickly. Very slow growth does not encourage more employment, or an increase in production to match demand.

Is a puzzlement.