This happens because when an individual saves, he also curtails his consumption. At the level of the entire economy, the aggregate demand falls and the economy enters into a recession. This is the paradox of savings and it happens when the savings are not quickly converted into investments, either by the private or the public sector. Investments generate more employment and hence more income. The basic issue is therefore not whether to save or not to save, but how to best channelise savings into investments so that the income growth through new employment generates more aggregate demand than what increased savings curtail.
Time is a very important factor in the paradox of savings.
Aggregate demand falls immediately as savings are intended, but aggregate demand rises only after the savings have been effected, investments done, employment increased and incomes received. The rise in the aggregate demand due to increased investments take some time after aggregate demand has been reduced through even an intention of savings. The danger of this time lag is that the corporate enterprises very often take the first round of drop in the aggregate demand as the manifestation of a demand recession and curtail their own production plans. In case the corporate enterprise is itself a saver, then this time lag does not come to assume any great degree of significance. Hence, the paradox of savings can be avoided when the household does not comprise the lion's share of aggregate savings.