The “paradox of thrift” was a theory made famous by renowned economist John Maynard Keynes. The theory posits that individuals will try to save more during an economic recession, which then leads to falling aggregate demand. Such “thrift” is harmful for everybody as the overall economy slows.
It appears that the “paradox of thrift” is now hitting Australian mortgage holders, with major lenders complaining that less than 10% of the 3.2 million people with variable mortgages are using the fall in interest rates to boost spending, with most instead choosing to pay back debt:
In a sign the RBA’s efforts to boost the economy with ultra-low rates may take longer to work, insights from the major lenders point to home buyers trying to run down their debt levels rather than going on a shopping spree…
