Does it matter if household save?

Trend in savings
1. As a proportion of income saved by UK households has steadily decreased
2. Keynesians tend to favour a fall in the savings ratio
3. Austrian economists say the decline in saving will hamper capital formation and the country's ability to grow
Factors driving consumption
1. Disposable income
  1. In 1995 gross disposable income was £503k whereas in 2005 it was £817k
2. Fall in the savings ratio
  1. Disposable income measures the income that households have to either consume or save, once fixed outgoings such as debt interest have been paid
3. According to Keynesians the increase in consumption caused by the above factors created short term economic growth enjoyed during the NICE decade
Keynesian view
1. They believe that the level of output and employment depends upon the level of aggregate demand in the economy.
2. Keynesians refute the classical assertion that the economy is self-regulating
3. They stimulate short run growth by running huge fiscal deficits
Paradox of Thrift
1. Thrift is beneficial for the individual but bad for society as a whole
2. More savings mean that less consumption. So there's less AD and hence less output and employment.
Interest rates
1. The Bank of England has lowered interest rates to 0.5% and this meant savers got negative real interest rates
2. Best interest rate offered was 2.89% but RPI was 4.7%.
Inflation
1. Bank refused to implement tighter monetary policy to control inflation when it was 3%
2. Inflation going forward has always been underestimated.
3. Inflation reduces incentive to save because inflation compromises the ability of money to act as a store of value
4. If savers begin to doubt the Bank of England's commitment to its inflation target, the savings ratio is likely to decline further in anticipation of higher interest rates.
Tax and benefit system
1. It no longer matters if households save because the state pays for mortgages if a person becomes redundant
2. In September 2010, the coalition reduced the rate of this benefit by 40%.
3. However even after this reduction half of the people claiming will receive more than the interest due on their mortgage courtesy of the taxpayer
A depreciating currency
1. Policymakers in the US and UK have tried to engineer an export led recovery
2. Keynesians argue that a falling currency can help to create an export led recovery because it helps with competitiveness.
3. Central Banks have used policies such as QE and zero interest rates to depreciate their own currencies.
4. Has penalised those who have chosen to save in USD and GBP
Why is the paradox of thrift wrong?
1. Investment increases productive growth
2. Without saving there can be no investment
3. Banks like Northern Rock werea bel to compensate for the UK's low savings ratio by borrowing from foreigners such as the Chinese
Barclays
1. Credit Crunch will continue until people save again. Austrian economists say that property speculation is malinvestment.
2. Malinvestment does not contribute to productive growth
3. Malinvestment creates debt
Pre credit crunch data
1. China and India have persistently out saved and out invested countries such as the UK and the USA
2. To create higher levels of investment and long run economic growth, the Bank of England must stop trying to hold UK interest rates down at an artificially low level
Central bank price fixing
1. Low interest rates discourage saving
2. Fixing has created excess demand within the money market
3. The level of investmetn will be rationed at q1

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Does it matter if household save?

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