4228618
Does it matter if household save?
- Trend in savings
- As a proportion of income
saved by UK households
has steadily decreased
- Keynesians tend to
favour a fall in the
savings ratio
- Austrian economists say the
decline in saving will hamper
capital formation and the
country's ability to grow
- As a proportion of income
saved by UK households
has steadily decreased
- Factors driving consumption
- Disposable income
- In 1995 gross
disposable income
was £503k whereas
in 2005 it was £817k
- In 1995 gross
disposable income
was £503k whereas
in 2005 it was £817k
- Fall in the savings ratio
- Disposable income
measures the income
that households have to
either consume or save,
once fixed outgoings
such as debt interest
have been paid
- Disposable income
measures the income
that households have to
either consume or save,
once fixed outgoings
such as debt interest
have been paid
- According to Keynesians the
increase in consumption caused
by the above factors created
short term economic growth
enjoyed during the NICE decade
- Disposable income
- Keynesian view
- They believe that the level of
output and employment depends
upon the level of aggregate
demand in the economy.
- Keynesians refute
the classical assertion
that the economy is
self-regulating
- They stimulate short run
growth by running huge
fiscal deficits
- They believe that the level of
output and employment depends
upon the level of aggregate
demand in the economy.
- Paradox of Thrift
- Thrift is beneficial
for the individual
but bad for society
as a whole
- More savings mean
that less consumption.
So there's less AD and
hence less output and
employment.
- Thrift is beneficial
for the individual
but bad for society
as a whole
- Interest rates
- The Bank of England has lowered
interest rates to 0.5% and this meant
savers got negative real interest rates
- Best interest rate
offered was 2.89% but
RPI was 4.7%.
- The Bank of England has lowered
interest rates to 0.5% and this meant
savers got negative real interest rates
- Inflation
- Bank refused to
implement tighter
monetary policy to
control inflation when
it was 3%
- Inflation going
forward has always
been
underestimated.
- Inflation reduces
incentive to save because
inflation compromises the
ability of money to act as
a store of value
- 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.
- Bank refused to
implement tighter
monetary policy to
control inflation when
it was 3%
- Tax and benefit system
- It no longer matters if
households save because the
state pays for mortgages if a
person becomes redundant
- In September 2010, the
coalition reduced the rate of
this benefit by 40%.
- However even after this reduction
half of the people claiming will
receive more than the interest due
on their mortgage courtesy of the
taxpayer
- It no longer matters if
households save because the
state pays for mortgages if a
person becomes redundant
- A depreciating currency
- Policymakers in the US and
UK have tried to engineer an
export led recovery
- Keynesians argue that a
falling currency can help to
create an export led
recovery because it helps
with competitiveness.
- Central Banks have used
policies such as QE and zero
interest rates to depreciate
their own currencies.
- Has penalised those who
have chosen to save in
USD and GBP
- Policymakers in the US and
UK have tried to engineer an
export led recovery
- Why is the paradox of thrift wrong?
- Investment increases productive growth
- Without saving there
can be no
investment
- Banks like Northern Rock werea bel
to compensate for the UK's low
savings ratio by borrowing from
foreigners such as the Chinese
- Investment increases productive growth
- Barclays
- Credit Crunch will continue until people
save again. Austrian economists say that
property speculation is malinvestment.
- Malinvestment does not
contribute to productive growth
- Malinvestment creates debt
- Credit Crunch will continue until people
save again. Austrian economists say that
property speculation is malinvestment.
- Pre credit crunch data
- China and India have persistently
out saved and out invested
countries such as the UK and the
USA
- 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
- China and India have persistently
out saved and out invested
countries such as the UK and the
USA
- Central bank price fixing
- Low interest rates discourage saving
- Fixing has created excess
demand within the money
market
- The level of investmetn will be
rationed at q1
- Low interest rates discourage saving
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