Saturday, 3 October 2009

The Paradox Of Saving



The savings ratio interests me enormously. The Keynesians point to the paradox of thrift. At an individual level, thrift is a pretty good idea. It is living within our means, it is ensuring that we do not take on more responsibility than we can afford, and so on. However, if we all were thrifty, then consumption – a key drive to our economic prosperity – would be much less than it otherwise would have been. The paradox is that, at the individual level, thrift enriches us, whilst at the collective level it impoverishes us.

If NIESR are right, and the ratio goes to 6.1% this year and 8.9% next year, then there is - in the words of the Chartists - a trend reversal. This is an important aspect of the 'New Normal' adjustment over the next ten years or so - the repairing of household balance sheets. In recent years we have become accustomed to inflation boosting our household balance sheets through house price inflation and through the rises in the stock markets. That has now come to an end, and looks to be at an end for some time to come.  If asset price inflation isn't going to bail out households, they will simply save more as a means to repair their balance sheets. It means that the recovery in the UK will have to be export led.

It’s just as well that the Bank of England has allowed Sterling to devalue, isn't it?

The return of thrift: The feel-bad factor | The Economist


John said...

Stephen, You might note, by comparison, this data for US savings:


Stephen Aguilar-Millan said...

Thanks for that John. I think that the problem is that whilst the US continues to dis-save (through the growing Fiscal Deficit), it is sucking in the savings of East Asia and the Petro-Economies. If the dollar is not allowed to fall (China has an unoffical peg at 120 Yuan), then this has to imply that US Federal Taxes must rise. I guess that the 10 year view of the future is one in which taxation becomes 'cool'. How about that as a turnaround?