A. The Case for Spending
The economy is stuffed if we collectively stop borrowing to spend. Since 2001, borrowing has been growing above trend and at accelerated rates. Approximate 'normal' levels have been:
- Consumer borrowing has been increasing by £100+bn per year
- Corporate borrowing by £50+bn
- HMG borrowing by £30-50bn
If GDP is around £1400bn then the economy has been boosted by 10-20% due to borrowing. This explains the miracle economy in a nutshell.
The so-called 'credit crunch' in late-2007 choked off 1 and 2 many years after time should have been called on the debt party. However, I wouldn't call it a proper credit crunch until the net increases of these fall to close to zero. This only really started to happen in 2008 Q4.The UK government are now trying to restore borrowing by using 3 to replace/finance 1 and 2. Hence the forecast budget deficits of £100-150bn over the next few years as we ride the brave new world of NuLabour Keynsian economics.
The theory goes that once that happens we can restore normality and we all live happily ever after. There will also be some lovely views of pigs flying along the skyline...
B. The Case for Saving
In sensible economies, it is normal to have a saving rate of 5-10%. This can take the form of pensions, cash, investment, etc. Putting aside money to boost the long-term economy (be it company investment, R&D, saving for a rainy day or pensions) is a good indicator for a nation.
Of late though, the usual suspects (UK, US, etc) have seen saving drop to 0% or even spend periods with negative savings rate. The maxim being "Live for today." This boosts economic growth in the short term but is madness long-term. History books show it to be lunacy and in this instance it will prove no different. So somehow we need to boost saving to build a stable economy in the future.
'Spending' is associated with the problem, 'Saving' with the solution. If we accept that long-term we need to move from 'Spending' back to 'Saving' how do we do it without the economy suffering a major contraction (aka depression)?
This is one of the major questions we have to find a solution to in order to heal the economy...
You make a good altruistic case for saving, but what is the case for the individual?
ReplyDeleteGiven that you won't get a return on your money in the bank that keeps up with inflation.
If you buy equities, during the good times you make generous donations to the poor city boys' bonuses but your savings go down the toilet if they screw up.
And if you don't save anything, the government with subsidize you through means testing when you are looking for support, so that the fools who did save pay for your council tax and holidays.
Seems like a mugs game to me!
Yup. I think it's one of the great tragedies of the current crisis that the fall guy has been identified as the prudent 'man on the street' saver. The exact opposite of who caused the problems.
ReplyDeleteWhat you are outlining is that in recent times (particularly the last 10 years) financially there has been a shift to accommodate the feckless and the dishonest. This has come at the expense of the prundent.
Today's move is the final nail in the saver's coffin as our gambling government have one last roll of the roulette wheel hoping zero comes up. Unfortunately, there's a good chance the currency will be the only 0 when they finish at the casino...
There will be a good time for savers in the future - my current guess is 2012 +/- 1 year when major incentives will be put in place to help heal the economy. Until then, if you're a saver it's seat of the pants stuff and you need to have your wits about you to retain your purchasing power.