Times are tough, so we all should stop spending and save as much as we can just in case we're laid off, right?  But if we all stop spending, businesses suffer, cut employees and eventually go out of business - making the chances of us personally losing our jobs greater.  Then again, if we spend like it's 2005, eventually we'll tap out our credit, go personally bankrupt - or be much less prepared in the case of unemployment.   And this, in not so elegant terms, is the Paradox of Thrift.

Right now, saving is good for the individual, but if everyone does it, the decrease in aggregate demand causes the overall economy to spiral downward.  One person's spending is another person's income.

I was just thinking back to my economics courses during the height of the dot-com boom.  Back then, The Paradox of Thrift seemed interesting, but very abstract and irrelevant to my life.  Now it's real, it's front and center - and it's a bitch.

Paul Krugman talks more about this here.
Megan McCardle here.

Addendum: In normal times, when consumers begin to spend less and save more, the Fed lowers interest rates which increases Investment, which can hopefully replace some of the lower levels of consumer spending.  These are not normal times, and the Fed can't really lower interest rates any further.  And hence, we get the Liquidity Trap.  There is no silver bullet.