Market Panics and The Paradox of Thrift

There is a concept in economics called the Paradox of Thrift. It is one of my favorite concepts in all of economics. The Paradox of Thrift states the following:

“If everyone tries to save more during a recession, then aggregate demand will fall.” – St. Louis Fed

In other words, if everyone is worried about a recession, a crash, a panic, then everyone starts to save money, prepare for the worst, load up the doomsday basement pantry with cans of beans and bottled water, and in doing so, because now they are spending less and doing less, preparing for impending doom, their lack of economic activity is what actually crashes the economy.

It’s a paradox!

Literally, the act of all of us thinking a recession is here, all at the same time, is what causes a recession. Here are some headlines into what I mean:

Elon Musk CEO of Tesla says he has a bad feeling:

Max Levchin CEO of Affirm is getting his company ready for a downturn:

Jamie Dimon the CEO of JP Morgan is bracing himself:

And if you keep going down the list, you will find more and more examples from CEOs, economists, and investors – they are all preparing for the worst.

Before I dive into what I really think is next for the markets, I want to say that I had no idea recessions and crashes were so easy to predict. This is news to me. I have tried to call a few tops in my life and failed each time, losing some money betting against the market. A lot has changed, however, since those days including the fact there is way more interconnected data. Perhaps people can more easily predict spending habits across the nation with real-time data? I have no idea.

Anyways, all week I have been thinking about the paradox of thrift. With so many people predicting we are entering a recession, with so much talk that the end of the bull market is here, I am left wondering if that very prediction is what will cause it to happen.

Based on the things I look at, I still see a really healthy economy. There is only one problem that could make things more difficult. I think the key to it all is the price of crude oil. Nothing else matters. Only oil matters right now.

With oil trading at $120 per barrel, it raises the cost of everything that uses oil to produce something. Cars, shipping, goods, transportation all go up a little because the cost to power them is now going up. The Fed can’t control inflation if oil is going up. I mean, no amount of interest rate hikes is going to pump more oil or magically make more oil appear. Until we get more clean energy (I think it’s happening) and more crude oil production (I think it’s happening, say hello to Canadian and Latin American oil) the market will be in a difficult spot.

So I’ll leave you with this, the most important chart in the world, which I will write more about soon – it is a chart of crude oil trading at $120 per barrel and not far from its recent highs of $130 per barrel:

So that’s that. We have ourselves quite the predicament – high oil prices and everything predicting impending doom.

At least here in NYC the restaurants remain crowded and streets active. It should be an excellent summer if you have a bike, electric car, and a love for alternative energy.