Seamus Coffey on the Savings Rate

One of the point that has been made repeatedly about the Irish economy over the past year or so is that weak domestic demand is connected with a high savings rate. (Admittedly, the actual national income data on personal savings rates are only available with a long lag but the slow pace of consumption spending is consistent with this story). Many, including now Minister Noonan, put this increase in the savings rate down to discretionary precautionary savings and believe that once people relax about their future, domestic demand will take off again.

I’ve always been pretty skeptical of this argument. My take on spending patterns has been that the increase in the savings rate may be more connected to people who had previously been able to live beyond their means having to pay back debt because of the change in financial market conditions, while others who have always saved continue to do so.

The implications of this story for the future evolution of the savings rate are quite different. There is little reason to think those who have been saving all along (e.g. for retirement) will reduce their propensity to do so. Indeed, if they were reliant on their funds invested in Irish property or in Irish pension funds now subject to the new levy, then the opposite would be the case. And those who are apparently saving because they are re-paying debt are, in practice, feeling as if every euro they earn is earmarked for either debt repayment or managing to keep going. These people are also unlikely to suddenly start spending if the economy stabilises.

Anyway, I’ve meant to make that point on this blog loads of times but didn’t. Then Seamus Coffey wrote this excellent post and, in comment speak, I want to say “What he said.”

46 thoughts on “Seamus Coffey on the Savings Rate”

  1. Aside from anything else, the level of deposits in Irish institutions is declining. It is below the level of loans, as it has been for some years. Not that we have reliable statistics going back that far (it is only under Mr. Honohan that the CB has started to publish figures).

    How’d’ya like dem loan-to-deposit rates Mr. Noonan?

  2. How can people increase savings collectively when the money supply is falling ?
    They may save a greater proportion of their individual income but this does not matter on a holistic basis.
    My deposits come from some one else’s consumption through credit provision
    The role of savings should be more directly tied to the leverage of society – If I save goverment bonds or cash a bank cannot lend cash due solely to legal reserve requirements rather then any real barrier.
    The price of credit sensitive assets fall.
    But what happens when the risk deposits are socialised withen a sovergin ?
    Yes it increases the tax burden on society – unless high powered money is created.
    The Banks have us by the nose & the tail.
    We are but cattle to them – they have used various autistic characters to make the journey through life more bearable for us as we dare not look at the machinery without a rising sense of horror.
    http://www.youtube.com/watch?v=QDWH_Sfnoc0

  3. An economy in decline, high unemployment rates, large swathes of the public service fearing job cuts, employees of private companies sensing demand is fragile. The plain old unvarnished fear uncertainty and doubt will turn of the spending spigot every time. Platitudes emanating from politicians are seen as self serving guff, they distorted the truth recently and they are doing it again. The NAMA propping of up property values ploy prolongs the agony. The Munster auctions exposed that farce. All the excesses that built up in the Tiger era still not being addressed.

    And probably the most important single factor the Gov’t going deeper into debt every month. The ECB and the IMF coming late to the realisation that it is a solvency problem and not a liquidity problem.

    Headlines daily:
    Ghizoni CEO of Unicredit ” If after a year of discussion without conclusion, we conclude there will be a haircut, the nest morning the market will massacre Ireland, Portugal and perhaps some others..”

    Josef Ackerman of Deutsche Bank
    “If it is Greece alone that is already big. But if other countries are drawn by contagion, It could be bigger than Lehman.”

    Lack of confidence might prove to be justifiable.

  4. The last section of Seamus Coffey’s note is really the key piece.

    “So what impact is this huge savings rate having on household deposits? Very little. What extra money is available for consumption? Not much. There may be some money that is currently being used to accelerate the repayment of debt. This will continue for the medium term and once households have repaired their balance sheets they will be in a position to increase consumption relatively quickly. It will take more than words from the Minister for Finance to get the tills rolling again.”

  5. I found this link on Jesse’s Cafe Americain, he is a precious metals speculator. It seems appropriate for the times. Smash Mouth – Walking on the Sun Lyrics on screen.

  6. @Mickey
    Great link
    I think Jesses core mantra rings true at least for this DorK

    “The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery”

  7. @ Mickey Hickey

    “Jesse’s Cafe Americain, he is a precious metals speculator

    You might find that he is not.

    You might find that he understands the nature of fiat.

    Are you sure you know how his portfolio is constructed?

    “In other words, the currency regime and financial deregulation are the setup, and the credit default swaps are the trigger. Why the politicians permit the naked selling and buying of such instruments by banks handling public money is beyond my understanding, save pure, blind greed.

    ……..

    “For this to happen, national governments must be undermined and absorbed, their people brought down to their knees financially. And then their saviors can begin the work of ordering their lives.”

    It’s working out quite well in Greece right now.

    Are these people tax collectors for the EU? IMF?

    Who are they?

  8. As I am in the Thrifty type of person, receiving 50 and spending 40, and saving 10. However, I now receive 45 (pay cut, taxes), spend 38 (deflation) and save 7. So the Thrifty group may have reduced their saving somewhat.

  9. @Greg
    The state is a mere monopolist of violence – it is a necessity to create a sense of order from chaos but what if it loses Legitimacy – what then ?

    I think I am remembering something Jesse said recently – the one disadvantage of the present monetory regeime when this thing reaches its crescendo is how few people will benefit from the criminality.
    Of course they may be successful if they engage in more extreme fascistic methods – lets hope it does not come to that but my belief is it probally will.

  10. @Karl and Seamus

    Great posts!

    Just to put on my sceptic’s hat for a moment, we might need to be careful in using changes in the stocks of deposits in distinguishing between the competing hypotheses.

    First, while domestic household deposits have shown a noticeable relative stickiness, I think we can be sure that a certain amount have been moved, obviously complicating the interpretation of the fall in the stock.

    Second, I think it is important to distinguish between the change in the saving rate and the change in the level of saving (the latter being what is most obviously related to the changesin the stock of deposits) at a time when disposable income has fallen dramatically — Keynes’ “paradox of thrift” comes to mind. A mechanical decomposition helps make the point: if S = s*Y, then dS = Y*ds + s*dY, where S is the level of saving, s is the saving rate, and Y is disposble income. Seamus might be able to put some quick and dirty numbers on this to get a sense of the increase in S (and by extension deposits) we should expect.

  11. @John McHale
    I think you are missing the point with your second point. Using the savings rate and disposable income to calculate expected savings rates is not going to shed much light – the savings rate is the problem – it doesn’t imply saving, it just means not consuming.

    The savings rate being so high is, IMO, simply because consumption was brought forward during the bubble. The incomes to support that consumption haven’t materialised, so it has to be paid back.

    This is nothing particularly new, the loons have been howling this one at the moon for a good while. http://www.thepropertypin.com/viewtopic.php?p=111751#p111751

  12. Lots of possible reasons which makes economics so frustrating:

    1) Precautionary
    2) The recession has affected people with low to negative savings ratios more than others.
    3) Credit squeeze
    4) Paying back over extended bubble credit
    5) Reluctance to spend ostentatiously, haven’t exec car sales been hardest hit?

    Noonan’s appeal seems to be directed at those in category (1) above or maybe category (5) as well.

  13. @Hugh Sheehy

    Disagree. The most important sentance is if fact the most basic one that:

    ‘In economics, the definition of savings is disposable income that is not spent.’

    That’s because The Savings Ratio economically speaking is known as a ‘Flow’ concept whereas the stock of deposits is unsurprisingly a ‘Stock’ concept.

    In most respects these concepts are by and large distant cousins in terms of relationship and hence when the narrative of mainstream media allows their relationship to become anything closer than distant you get daft commentary such as the MoF was guilty of recently.

    In even more basic terms:

    Savings Ratio – (DI-C)/DI where DI is disposable income and C is consumption.

    Time 1: DI = 100, C=90. therefore SR = 100-90/100 = 10%

    Time 2: DI = 90, C= 80, therefore SR = 90-80/90 = 11%

    Rate of change in SR =1/10 = 10%.

    You’ll notice the term deposits or stock thereof is not mentioned once in the above and yet the savings ratio has gone from 10% to 11% a 10% move. Sadly mainstream media would have one believe, as Seamus correctly notes, that we’re swimming in additional cash whereas in fact DI has fallen by 10% but consumption has fallen faster by 11.1% thereby increasing the SR i.e. completely unrelated to the stock of deposits held.

  14. Hi John,

    On the first point I would bear in mind that these are the Sectoral Accounts produced by the Central Bank and are not exclusively about the Irish banking sector. By construction these accounts are supposed to give an insight into each sector’s interaction with the domestic and international banking systems.

    The Credit, Money, and Banking Statistics (Table 11.1) put deposits from the Irish Household sector in banks operating in Ireland at €94.6 billion at the end of 2010. The Trends in Personal Credit and Deposits data released yesterday have a figure of €87.5 billion but that is for private households rather than the entire Household sector which also includes non-incorporated enterprises and not-for-profit institutions in the Money and Banking Statistics Households category.

    The Household Sector Financial Accounts give a figure of €124 billion for Household currency and deposits. With about €12 billion of currency in circulation it the Accounts indicate that the Irish household sector had about €112 billion of deposits between the Irish and international banking systems at the end of 2010. At the end of 2009 it was €111 billion. By all measures the deposits of the Irish household sector are falling.

    I don’t know how the Central Bank are able to do it but we must assume they can estimate the level of deposits moving between the domestic and international banking systems when producing the Financial Accounts.

    On the second point, I would not be so quick to begin with the assumption that we are “at a time when disposable income has fallen dramatically”. From the CSO’s Non-Financial Accounts net household disposable income was €91.7 in 2008 and fell to €89.6 billion in 2009, a drop of 2.3%. The 8.3% drop in household income was tempered by falling interest rates and increased social benefits. We do not have the 2010 figure yet and it is likely the rate of decline in disposable income will have increased.

    I’m not sure what increase in deposits we can expect but in 2009, household consumption expenditure was €81.0 billion. There was about €8.5 billion of disposable income that was not used for consumption.

  15. Thank god for this post. I’m sick of reading articles about the hundreds of millions stashed in this rich country that could easily be taxed/confiscated thus solving all our problems. Savings does not equal cash in the bank.

  16. We haven’t heard about the ‘great de-leveraging’ for a while, but I reckon Seamus Coffey has presented some quantitative evidence. I also reckon – and this is obviously much more difficult to evidence – (in line with John McHale’s observation) that some savers have moved, and are moving, their pots to other jurisdictions. This, perhaps, is one of the key differences between the recovery from the Great Depression and the uncertain recovery prospects now – in particular for those countries, such as Ireland, which have taken a serious hit.

    The absence of capital controls makes financial repression difficult if not impossible. Forced savings (taxation) intended to diminish the availability of voluntary savings for migration may end up encouraging not only the migration of the savings pots, but also of the individuals holding them.

    So the burden falls increasingly on those without savings and on those lacking internationally marketable skills.

  17. Currently, I am saving a lot. However, my bank deposit are falling. It is in fact my debts that are coming down. From the banking statistics, this is also clearly what is happening in Ireland: even though household deposits are falling somewhat, loans to households are going down much more quickly. The higher savings rate translates into deleveraging. I see that as good news as Irish households have too much leverage collectively.

  18. If Ireland has a positive (or at least balanced) net asset position with the rest of the world does it not follow that when we talk about deleveraging we are talking about a domestic phenomenon.

    In other words Irish debtors are repaying or reducing their debts to Irish savers.

    Now, in the aggregate, what is happening to the difference or excess between what is repaid and what is lent out again? So if total lending and total borrowing has fallen by 10 billion, what has happened to this 10 billion that has been repaid?

    Are we not experiencing excess desired saving by savers a la Keynes’ cross?

  19. Hi Seamus, Karl,

    I tried to post this on Seamus’s blog, but for some reason I was getting an error.

    If I can turn things on its head. Forgive me if I’m wrong, but those charts smack of Steve Keens credit accelerator theory. Turning conventional wisdom on its head he says that credit creates deposits, i.e. money supply is generated by loan issuance, so therefore as credit contracts, deposits must necessarily contract. Interestingly, if this is accepted, then counter-intuitively, it is the profligate that enable the thrifty to be thrifty.

    If I may selectively quote from an article of his found here:
    http://www.debtdeflation.com/blogs/2011/06/11/dude-where%e2%80%99s-my-recovery/

    “The Credit Accelerator at any point in time is the change in the change in debt over previous year, divided by the GDP figure for that point in time. From first principles, here is why it matters.

    Firstly, and contrary to the neoclassical model, a capitalist economy is characterized by excess supply at virtually all times: there is normally excess labor and excess productive capacity, even during booms….. The main constraint facing capitalist economies is therefore not supply, but demand.

    Secondly, all demand is monetary, and there are two sources of money: incomes, and the change in debt…… Aggregate demand is therefore equal to Aggregate Supply plus the change in debt.

    Thirdly, this Aggregate Demand is expended not merely on new goods and services, but also on net sales of existing assets…..

    In a well-functioning economy, periods of acceleration of debt would be followed by periods of deceleration, so that the ratio of debt to GDP cycled but did not rise over time. In a Ponzi economy, the acceleration of debt remains positive most of the time, leading not merely to cycles in the debt to GDP ratio, but a secular trend towards rising debt. When that trend exhausts itself, a Depression ensues—which is where we are now. Deleveraging replaces rising debt, the debt to GDP ratio falls, and debt starts to reduce aggregate demand rather than increase it as happens during a boom.”

    He makes a powerful case that it is the rate of change of acceleration of credit that determines demand, and thus GDP. So perversely GDP can rise, even as credit is contracting, as long as it is contracting at a slower rate than the year previous. Once the rate of deleveraging accelerates, demand deteriorates and GDP falls once again.

    Mr Noonan is barking up the wrong tree.

  20. @christy
    Households => Deleveraging
    Corporates => I don’t know exactly. Stable I think.
    Rest of the word => basically stable (current account balance close to zero)
    Public sector => Leveraging (high budget deficit)

  21. The Irish households have the highest debt/income ratio in the western world .The deflation of the property market has impoverished many of them. Many of them live under the menace of unemployment ,the retirement system is not particularly strong. The best advice that can be given to many of them is “save as much as you can”. Granted, the cumulative effect of an increase of the savings rate is disastrous for the economy as a whole, highly deflationary and conducive to a higher unemployment rate .It still bothers me to see a Finance Minister advise the citizens to spend as much as they can ,which is good advice for the nation as an entity but terrible advice for the citizens taken separately.
    Maybe it does not matter too much because I do not think that such an advice does not make a cent of difference one way or the other, the citizens being usually rational economic agents. It does not increase the confidence of the governed toward the government, though.

  22. @Incognito

    So is it that gov borrowing is sucking up these excess savings?

    What will happen as we reduce the budget deficit?

  23. Also, has teh situation affected by the fact that the state is actually borrowing from abroad? Is it that Irish excess savings are actually being invested abroad but are being matched by government borrowing from abroad?

  24. @ Sarah

    It is slightly off topic but the fact that Ireland has a current account surplus with the rest of the world means that the private sector is accumulating financial assets greater than the €18Bn deficit. Admittedly private sector does not equal households, nonetheless this country is well capable of financing the Government deficit without recourse to foreigners or to international bailers out. The reality is that the Irish private sector prefers to fund foreign governments’ deficits rather than their own.

  25. @christy

    “..So is it that gov borrowing is sucking up these excess savings?

    What will happen as we reduce the budget deficit?.”

    You’re getting perilously close to the DoC giving some stern advice – watch this space !

  26. Seamus has again produced useful analysis on a pertinent topic.

    In the US, headline data shows that households are deleveraging by reducing debt; on closer examination, most of the reduction results from bank debt write-offs.

    As for the US personal savings rate currently at 5% compared with Japan’s 2% level, it would be wrong to assume that Americans are more frugal than Japanese consumers.

    The people with most of the money don’t shop in Wal-Mart and the real median earnings of a US male worker is at the 1969 level — with no prospect of equity release from rising home values, the rise in the savings rate from below zero at one point in 2005, isn’t going to be of much help.

    Regarding the Irish balance of payments surplus, caution is required because of tho multinational impact. Two-thirds of FDI flows are portfolio transfers and for example Microsoft’s upcoming $8.5bn payment for Skype may well come from Dublin.

  27. Noticed that RTE one o clock news reporting on loan/deposit shrinkage making the same elementary mistake again.
    Noting that loans are down because deposits are down…….
    Loans come first – they create deposits.

  28. @Seamus Coffey
    “I don’t know how the Central Bank are able to do it but we must assume they can estimate the level of deposits moving between the domestic and international banking systems when producing the Financial Accounts.”
    I would guess that Target2 is the answer; that is its function after all… except, of course, when it is giving loans to Irish consumers to buy German cars…

  29. So our private sector is now a large net lender – and that flow of net lending (excess saving) is going abroad.

    The public sector is a large net borrower but that flow is coming from abroad.

    In the aggregate the net flow from the private sector slightly exceeds that from teh public sector.

    Now what happens when we shrink the gov budget deficit? Does it restore confidence in the sustainability of the Irish fiscal position and attract more excess Irish private sector savings into financing gov debt (including roll over) or does it act as a drag on aggregate demand? through a Keynes’ cross type thingy?

    Also, on a different point, given that IMF debt is senior to existing gov debt how good is the interest rate being offered?

    If we were to say to the Irish private sector or indeed foreign investors, we’re facing bankruptcy, all new debt will be senior to existing debt, and ignoring contractual problems with that, would and if so at what rate would teh private sector fund the deficit at? I mean is an 80% write off of Irish debt likely so as to affect senior debt holders/ IMF?

  30. Excellent piece by Seamus Coffey. An additional point on weak consumer spending (given that hoarding money is often the sole reason given) is the decrease in employment; in particular full-time employed.

  31. @ Michael Hennigan

    I share your skeptism on our BoP surplus given the imponderable impacts of US MNC activity. Nonetheless, John Fitzgerald (ESRI), a big trumpeter of our BoP surplus, corrected me in this blog when I suggested that the position was spurious due to the MNCs.

    He assured me that the necessary classifications are made to the transactions of the international sector to make our current account figures meaningful, thus your example would show up as a capital transaction.

  32. The key reason for the sharp rise in the savings rate has been the enormous fall in private sector wealth since 2007 (“wealth effect”).

    The Central Bank has done some work analysing this. Their analysis is set out on page 43 print version (page 45 pdf version) of their most recent quarterly bulletin which is available at http://www.centralbank.ie/publications/Documents/Quarterly%20Bulletin%20Q2.pdf

    By the CB’s reckoning, net wealth is now (Q3 2010 is their most recent estimate) €439b. This represents just 54% of estimated peak net wealth (Q4 2006). That being so, the loss in net wealth must be of the order of €374b (= 46%/54% x €439b). That would be equivalent to 3 times national income (GNP at circa €125b pa).

    Caveat: while the CB’s text suggests a €374b drop in net wealth, chart 16 suggests a considerably lower drop. In any event, the calamity on the balance sheet of the Irish private sector has been horrendous.

    It is this obliteration of private sector wealth which, in my opinion, is the key reason for the sharp rise in the savings rate of the Irish population. Citizens are attempting to repair their obliterated balance sheets for fear of facing a pauperised old age. In this respect at least, we face a classic balance sheet recession (vide Richard Koo).

    This is not to deny that other factors (uncertainty, precautionary principle) are at play. But you should be fundamentally altering your lifestyle if your net assets drop by the equivalent of three times your annual income. The other points to note are:

    a. GNP continues to fall; and
    b. property prices continue to fall.

    Thus the scale of personal financial distress across the economy continues to worsen. The yield on 10-year bonds has increased from 9.5%, when he took office, to over 11.5% today.

    Meanwhile finance minister Michael Noonan assures us that “we are making progress every week.” I understand that Michael Noonan used to teach English. Maybe he could explain what he understands by the word “progress”.

  33. @ Michael hennigan
    Interesting point re balance of payment surplus.
    Anyone from the ‘wohoo our balance of payments are brilliant’ brigade have anything to counter this?

    Is there anyway we can measure the size of the effect that the MNCs are having on the balance of payments number?
    Or would these figures be kept from the public in much the way individual MNC effective corpo tax rates are kept from view by the revenue commissioners?

  34. One of the long term effects of the Scandinavian banking crisis was an increase in private savings (which no doubt originally included debt repayments) and decline in demand for private credit.

    As a result Swedish (and other Scandinavian) banks started to lend, than buy into, the Baltic markets resulting in a situation where, for example Estonia, the newest member of the Euro, only has one very small domestic bank while the rest of the banking sector is dominated by mainly Swedish banks.

    It will be interesting to see how attitudes towards private credit and saving patterns will develop in Ireland over this decade. It would not surprise me if our attitude towards credit will be a bit like quitting smoking: difficult at first to do without and then one day the habit seems almost repulsive.

    I also suspect that many SME`s will adopt a variety of credit alternatives which will not involve relying on banks.

  35. @ Brian Woods II /Eamonn Moran

    The trade balance is the main generator of the surplus and as overseas firms are responsible for 90% of tradeable exports, most of the surplus in any year wouldn’t belong to Irish residents.

    As for Microsoft, its 2 companies operating from the offices of Ormbsy Prentice, would generate exports in say 2011 from their overseas patent income and profits channeled to Dublin adding to their cash balances. These would be shifted back out via investments in other foreign locations.

    On paper Irish companies have as much FDI overseas as foreign companies in Ireland; However, CRH the biggest, is for practical purposes not an Irish company as most of its operations and funding are not done in Ireland and dividends would mainly go to overseas residents. Ditto for Smurfit Kappa.

    The CSO has to be careful about data that could result in identifying particular companies.

    Tracking activities at the IFSC must be difficult and the leasing industry with less than 1,000 employees has more than 3,000 aircraft at a value of about $90bn on their Irish books.

    Keith Walsh, an economist at the Revenue, presented a paper on MNCs using tax data at the statistical society late last year.

    http://www.ssisi.ie/US_Companies.pdf

    Jim Stewart of Trinity College poured cold water on some of the conclusions.

  36. “There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: ‘In the long run we are all dead.’ And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.”

    Henry Hazlitt, from his ‘Economy in One Lesson’:

    From time immemorial proverbial wisdom has taught the virtues of saving, and warned against the consequences of prodigality and waste. This proverbial wisdom has reflected the common ethical as well as the merely prudential judgments of mankind. But there have always been squanderers, and there have apparently always been theorists to rationalize their squandering.

    The classical economists, refuting the fallacies of their own day, showed that the saving policy that was in the best interests of the individual was also in the best interests of the nation. They showed that the rational saver, in ma king provision for his future, was not hurting, but helping, the whole community. But today the ancient virtue of thrift, as well as its defense by the classical economists, is once more under attack, for allegedly new reasons, while the opposite doctrine of spending is in fashion.

    In order to make the fundamental issue as clear as possible, we cannot do better, I think, than to start with the classic example used by Bastiat. Let us imagine two brothers, then, one a spendthrift and the other a prudent man, each of whom has inherited a sum to yield him an income of $50,000 a year. We shall disregard the income tax, and the question whether both brothers really ought to work for a living or give most of their income to charity, because such questions are irrelevant to our present purpose.

    Alvin, then, the first brother, is a lavish spender. He spends not only by temperament, but on principle. He is a disciple (to go no further back) of Rodbertus, who declared in the middle of the nineteenth century that capitalists “must expend their income to the last penny in comforts and luxuries,” for if they “determine to save… goods accumulate, and part of the workmen will have no work.” Alvin is always seen at the night clubs; he tips handsomely; he maintains a pretentious establishment, with plenty of servants; he has a couple of chauffeurs, and doesn’t stint himself in the number of cars he owns; he keeps a racing stable; he runs a yacht; he travels; he loads his wife down with diamond bracelets and fur coats; he gives expensive and useless presents to his friends.

    To do all this he has to dig into his capital. But what of it? If saving is a sin, dissaving must be a virtue; and in any case he is simply making up for the harm being done by the saving of his pinchpenny brother Benjamin.

    It need hardly be said that Alvin is a great favorite with the hat check girls, the waiters, the restaurateurs, the furriers, the jewelers, the luxury establishments of all kinds. They regard him as a public benefactor. Certainly it is obvious to everyone that he is giving employment and spreading his money around.

    Compared with him brother Benjamin is much less popular. He is seldom seen at the jewelers, the furriers or the night clubs, and he does not call the head waiters by their first names. Whereas Alvin spends not only the full $50,000 income each year but is digging into capital besides, Benjamin lives much more modestly and spends only about $25,000 Obviously, think the people who see only what hits them in the eye, he is providing less than half as much employment as Alvin, and the other $25,000 is as useless as if it did not exist.

    But let us see what Benjamin actually does with this other $25,000 He does not let it pile up in his pocketbook, his bureau drawers, or in his safe. He either deposits it in a bank or he invests it. If he puts it either into a commercial or a savings bank, the bank either lends it to going businesses on short term for working capital, or uses it to buy securities. In other words, Benjamin invests his money either directly or indirectly. But when money is invested it is used to buy or build capital goods—houses or office buildings or factories or ships or trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption.

    “Saving,” in short, in the modem world, is only another form of spending. The usual difference is that the money is turned over to someone else to spend on means to increase production. So far as giving employment is concerned, Benjamin’s “saving” and spending combined give as much as Alvin’s spending alone, and put as much money in circulation. The chief difference is that the employment provided by Alvin’s spending can be seen by anyone with one eye; but it is necessary to look a little more carefully, and to think a moment, to recognize that every dollar of Benjamin’s saving gives as much employment as every dollar that Alvin throws around.

    A dozen years roll by. Alvin is broke. He is no longer seen in the night clubs and at the fashionable shops; and those whom he formerly patronized, when they speak of him, refer to him as something of a fool. He writes begging letters to Benjamin. And Benjamin, who continues about the same ratio of spending to saving, not only provides more jobs than ever, because his income, through investment, has grown, but through his investment he has helped to provide better-paying and more productive jobs. His capital wealth and income are greater. He has, in brief, added to the nation’s productive capacity; Alvin has not.

  37. @Dom K

    Nice tale – but the point is what exactly?

    If it is what I believe it is i.e. saving is a noble activity when practised as noted by Benjamin then I agree.

    The point here of course is that there are an inordinate amount of people who would love to be in a position to practice saving as a pastime but simply don’t have the means to do so.

    Latest Credit Union of Ireland report refers where the average ‘left over’ cash at the end of March for the average household was c70 Euro. Taking into consideration ECB rate increases in the meantime this figure is virtually wiped out for the average household with an average mortgage.

    Unfortunately fairy tales have an annoying habit of masquerading the real world – and in the real world putting a bit aside like Benjamin is simple not possible despite its obvious nobility.

  38. @ Michael H

    ‘CRH the biggest, is for practical purposes not an Irish company as most of its operations and funding are not done in Ireland and dividends would mainly go to overseas residents. Ditto for Smurfit Kappa’

    Depends whose practical purposes you are talking about. Some companies have barefacedly retained the (multifarious and highly arcane) accounting advantages of Irish jurisdiction, while dumping their Irish cost base. Politicians asleep at the wheel.

  39. @ Michael H

    ‘The CSO has to be careful about data that could result in identifying particular companies’

    Surely there are bigger things that the CSO, and other institutions, ought to be careful about. Unthinking, blanket deference to commercial secrecy has led us right towards national insolvency. So many dogs that didn’t (and still don’t) bark.

  40. @ Yields or Bust

    I am puzzled by your post above….the one addressed at me. Were you trying to educate me (not necessary on this occasion) or merely further highlighting the simplistic nature of Minister Noonan’s misunderstanding?

  41. It isn’t actually necessary for the savings rate to fall to generate an increase in consumer spending, although that might well be desirable. For a modest increase in consumer spending, it is sufficient for the savings rate to stop rising.

    Over the long-term, consumer spending is financed by the real wealth resulting from increased production, particularily production for export, in the wealth-producing sectors (manufacturing, services exports, agriculture, tourism). In 2011, for the first time in decades, all of these sectors are likely to grow strongly.

    Changes in the savings rate may result in consumer spending fluctuating above or below the trend line that is determined by this increased wealth production. In the 1990s, the savings rate did not fall continuously. Rather, it fluctuated above or below the trend line. Yet, there was a massive increase in consumer spending resulting from the rapid growth in production for export.

    In short. You can have a consumer boom with a savings rate of 4%. You can have a consumer boom with a savings rate of 15%. But, you can’t have a consumer boom during the period when the savings rate is moving from 4% to 15%. Such a period we have had in the past few years.

    What needs to be recognised is that the correction of the imbalances, that developed in the Irish economy in the run-up to 2007, is now largely complete. These were: (a) a balance-of-payments deficit (b) a comparative price level that was too high in comparison with competitor countries (c) construction output too high as a share of GDP. Notwithstanding that, for political reasons, some economists greatly exaggerated these imbalances, in a similar manner to how they have now been shown by the census results to have greatly exaggerated emigration figures, the fact remains that they were genuine imbalances and needed to be corrected. An increase in the savings rate was the principal mechanism for achieving these corrections. But, the corrections have now occurred. The balance-of-payments is now in suplus. Eurostat figures earlier this week showed a dramatic fall in the comparative price level in Ireland in 2010 (which has almost certainly continued in 2011). Construction output has fallen to 2.5% of GDP, probably the lowest ever recorded in a developed country. Given all this, it is economically desirable that the savings rate should stop rising. The rise that has allready occurred has done its job. The savings rate simply no longer rising will itself result in modest increased consumer spending, as the wealth-producing export sectors are doing so well. Then, a couple of years down the road, when the economy is stronger, the savings rate can fall again. But, for now, bringing a halt to the rise in the savings rate should be the government’s priority. They should use yesterday’s census figures to boost confidence as a means to achieving that end.

  42. @Hugh Sheehy

    Simply pointing out that comparing the stock of deposits and the savings ratio is akin to comparing apples and oranges – they two may or may not have a link but that link is not as obvious as suggested.

  43. @ Yield or Bust

    I remember the Finance Minister Noonan calling for shoppers to save the economy on more than one occasion. The (incorrect) narrative that consumption drives the economy is deeply rooted in general public and therefore deserves attention in any debate on savings. Going back to basics of what happened in Ireland – a classic case of misallocation of capital (leveraged, to make matters worse) resulting in a broken balance sheet of the country. Deleveraging of banks and individuals is one of the necessary corrections and should not be frowned upon regardless to whether it results in increase of deposit stock or decrease of debt (fundamentally the same thing). As illustrated in the ‘fable’, savings drives capital investment while consumption is destruction of capital so to call for increase of consumptions in a country which is overly indebted is fundamentally wrong. Countries with high level of savings and capital investment achieve high levels of productivity, like Switzerland for example. The point was that the narrative of the government on spending is simply wrong. But then again, successive governemnts seem to be much more concerned with VAT receipts than with the general health of the economy.

  44. @Yields, Dom K
    The difference between a flow and a stock is one that would be useful to apply to all our govt’s economic policies. We’re borrowing a stock of debt in order to keep a flow of GDP going.

    The destruction/reduction of national wealth doesn’t bear thinking about.

Comments are closed.