Monday, March 07, 2011

Resolving the Paradox of Thrift in Spain

This is a creative way to get people to spend part of their savings:
Spain town reintroduces peseta to boost economy

A small town in northern Spain has decided to reintroduce the old Spanish currency - the peseta - alongside the euro to give the local economy a lift.

Shopkeepers in Mugardos want anyone with forgotten stashes of the old cash at home to come and spend it. It is nine years since the peseta was official currency in Spain. But Spain's economic crisis has forced some to be inventive. The hard times have seen thousands of businesses close and more than two million jobs go.

More than 60 shops in Mugardos, a small fishing town in Galicia on Spain's northern coast, are accepting the peseta again for all purchases, alongside the euro.
This is a good reminder that we're still very much in the classic situation described by the notion "paradox of thrift". The boom leading up to the Great Recession (in Spain just as much as in the US) was in large part the result of excessive household borrowing. Over the last two years households have been very busily and effectively reducing their debt burdens by saving more (or paying down their debt, as the case may be). This is very good news for individual households, as well as for medium-term prospects for the recovery.

But the paradox is that what's good for individual households - rebuilding their balance sheets - is bad for the economy. To spark a solid recovery in the short-term (especially when governments in the US and Spain both seem set to enact contractionary policies in 2011), households need to be willing to spend, not save.

So I applaud some clever thinking in Spain that may help them to square this circle; this plan allows people to spend some peseta savings that were sitting in the figurative mattress, while simultaneously reducing their euro-denominated debt. Who said paradoxes were unresolvable?


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