When everyone saves more, everyone saves LESS
Keynes's Insight (1936): "For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums."
The Fallacy of Composition: What's good for one person (saving more) is BAD for everyone when everyone does it.
Every dollar spent becomes someone else's income. When spending falls, it creates a downward spiral. The "multiplier" works in reverse—a $1 reduction in spending can reduce total income by $2-5.
During the pandemic, EU household savings jumped from 12.5% to 17%. This "precautionary saving" contributed to economic contraction, even as individuals rationally prepared for uncertainty.
This is why governments increase spending during recessions. When private saving rises, public dissaving (deficits) can offset the paradox and maintain total demand.
Some economists argue savings fund investment, ultimately increasing production. The paradox is strongest in the short run; long-run dynamics may differ. But Keynes noted: "In the long run, we are all dead."