Saving incentives

lalman

I have found all of the responses really interesting - thank you everyone.

I did read Taleuser's twice because i was looking for a solution for the elegant problem that you explained far better than i.

As you all agree with my general way of thinking about the UK and world economy - the only potential solution is keeping interest rates ultra low for potentially decades and increase the capital ratios institutions need to hold against our debt and eventually raise rates and actually absorb the losses as they occur.... (again tell me if i am wrong) Clearly this would lose the election for officals but its the only radical way of thinking that could solve the issue coupled with financial education in schools...

So if this is the case, we are in an economic depression which due to the nature are likely to keep interest rates at zero for the foreseeable future.

Shouldn't we base our consumption and investment decisions on a zero rate policy? Shouldn't we be buying riskier assets than holding cash reserves? and where does it leave the UK and the world for when we have our next downturn? - say if eventually China has to let its currency appreciate and it causing a hard landing or Europe goes into recession again... more money printing? - that again would point to buying riskier assets... my point being, conventional economics and solutions in a financial crisis seem to generate so many additional problems and bubbles that maybe we should just allow the damage to hit our economy... and rebuild from the lower base.

talexuser

I don't think anyone knows, we are in uncharted territory. When the bailouts occurred I thought of the John Major slump and negative equity for the first time in my memory, many suffered for a couple of years, but once fundamentals were properly priced growth resumed quite quickly.

The crunch may have been an order of magnitude or more worse but the alternative may have been to nationalise the retail and savings banks, but goodness knows what would have happened to stock prices and everything that depended on them, maybe we would have been better with a short sharp correction throwing out a lot of gamblers, who knows?

What we have left is the Japan scenario repeated, maybe 20 years of anemic limping along, with inflated property and land values? The "policy is working" talk now does not convince me, where are the exports? where is the manufacturing industry? why does government still need to prop up house buying and small business investment? where is the debt reduction?

And a Happy New Year!

black_taxi_2

opinions4u
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so true----Osborne/housing
ed milliband/gas,elect



The electoral cycle is shorter than the economic cycle.

So fixing things for the long term good isn't in any politician's interests.

DealFan

lalman wrote: »

I apologise if this is in the wrong location but something has been bugging me for a while.

One of the reasons the UK is in a mess (and the USA) is that we spend more than we save. We have a national debt of i believe 1.3tr, private debt of 1.4 tr and unfunded liabilities of around 4 tr (public pensions etc) that the government keeps off the balance sheet and doesn't mention.

Secondly, this recession has been blamed on interest rates being 'too low for too long' in the wake of 2002-2006.

So i ask the question, aren't we repeating the exact same thing as before? national debt is a record levels, private debt is at record levels, unfunded liabilities are at record levels.... interest rates are at record lows for a record amount of time... and people are not saving because there is no incentive to do so (apart from us on this forum).

Tell me if my thought process is wrong... please....

I'm entirely in agreement with you.

Thrugelmir

Pushing back the pension age saves the country £500 billion.

So we've made a start in addressing what needs to be a cultural change of habits.

People will be "encouraged" to save. As early retirement in any form. Even reducing hours to part time. Has only one method achievement. Save, save, save.

doughnutmachine

The only realistic way to make people save is to reduce/ eliminate the welfare safety net. In places like China there are no benefits if you lose your job/ retire etc. That means Chinese workers save over 50% of their salary in case misfortune strikes!!!! In the UK people save something like 4% of their salary.

Why worry about Government debt anyway? The BoE have their own banknote printing press that they have already used to print £375 billion.

bigadaj

doughnutmachine wrote: »

The only realistic way to make people save is to reduce/ eliminate the welfare safety net. In places like China there are no benefits if you lose your job/ retire etc. That means Chinese workers save over 50% of their salary in case misfortune strikes!!!! In the UK people save something like 4% of their salary.

Yes, but given that for the last few decades consumer spending has been pretty much the only thing growing in our economy a drastic reduction would be terrible news for the wider economy.

I have a lot of sympathy for savers in the current environment but looking at overall economic interests then I can understand why excessive saving could be viewed as something to discourage, particulalry as the banks are simply trying to rebuild their balance sheets rather than utilise cheap savings to lend to productive industry.

The government should be encouraging people to invest rather than save, and an extension of peer to peer lending, with the introduction of better regulation would be a useful way to connect savers with those who might productively use their money.

doughnutmachine

bigadaj wrote: »

Yes, but given that for the last few decades consumer spending has been pretty much the only thing growing in our economy a drastic reduction would be terrible news for the wider economy.

I have a lot of sympathy for savers in the current environment but looking at overall economic interests then I can understand why excessive saving could be viewed as something to discourage, particulalry as the banks are simply trying to rebuild their balance sheets rather than utilise cheap savings to lend to productive industry.

The government should be encouraging people to invest rather than save, and an extension of peer to peer lending, with the introduction of better regulation would be a useful way to connect savers with those who might productively use their money.

I agree with what you write, we need people to spend savings to stimulate the economy.

At the same time I've often though how much better the UK would be if we stopped wasting money on cheap consumer plastic tat and invested the money in things that are worthwhile.

lalman

I agree with both of your points to a degree- we need to increase our investment rate but i disagree that we need to save less/ spend what we save.

I don't think people in this country save enough money in the first place, and if they spend what they saved it would just make the already unbalanced economy... more unbalanced. If people saved and invested more, it would move the economy away from purely consumption (well 65% of it) to hopefully a 50% ratio that i believe is far more sustainable.

Also, if you look at the demographics on who actually saves and who actually has the debt, although i haven't looked at the data in great depth i would suspect that younger people (under the age of 30) would have alot of debt. I.e. Mortgages, student loans and also general consumption that people tend to do younger because they don't see themselves ever getting old.

Why i mention this is property prices are at or near records which means younger people need additional debt for this reason which prevents them from saving in the future because there cashflow from there income is tied up in mortgage repayments and student debt repayments...

As these people get older - say to 40 -50 they will continue to pay off the debts they accumulated in there 20's where as older generations tended to be coming out of this debt earlier and could use there income for either consumption (which helps the current economy) or save for retirement...

The 20's of today won't save enough for there retirement for this reason and i believe we are likely to see the savings rate keep reducing for the years ahead.... unless we see a drastic change in supply side for properties, a reversal of government cuts on tuition fees (shouldn't we be encourages education?!?!?!!).

Tell me if my analysis is wrong...

Jegersmart

lalman wrote: »

I apologise if this is in the wrong location but something has been bugging me for a while.

One of the reasons the UK is in a mess (and the USA) is that we spend more than we save. We have a national debt of i believe 1.3tr, private debt of 1.4 tr and unfunded liabilities of around 4 tr (public pensions etc) that the government keeps off the balance sheet and doesn't mention.

Secondly, this recession has been blamed on interest rates being 'too low for too long' in the wake of 2002-2006.

So i ask the question, aren't we repeating the exact same thing as before? national debt is a record levels, private debt is at record levels, unfunded liabilities are at record levels.... interest rates are at record lows for a record amount of time... and people are not saving because there is no incentive to do so (apart from us on this forum).

Tell me if my thought process is wrong... please....

In my opinion the answer is "yes" - we ARE repeating the previous cycles over and over again and we don't seem to realise it. The UK along with the majority of other developed nations will have to default on their debt at some point, but it may take some time to get there.

There are various reasons why interest rates are low, as mentioned it may encourage people to spend because either a) they save less or b) could get access to very cheap loans for example. The more important reason is that with the amount of debt we have now and the velocity it is increasing means that high interest rates would result in huge increases in costs in servicing that debt. And who services the debt? We taxpayers do.

So when you think about interest rates, whilst they are hugely important in certain ways - they are entirely meaningless in a discussion about savers/investors. The lower the interest rate the cheaper we can borrow, and the reverse benefits savers. The vast majority of people are not going to be one or the other consistently throughout their lives, i.e. there will be times when you save more or spend more as we go.

Interest rates basically just cover up the debasement of our currency and the cost of having a financial system such as the one we have now to us taxpayers. It also allows the government and central banks to manipulate how we feel about our "lot" in life. No one complained when house prices in the UK were going up 20% per year for a number of years, very few viewed this with suspicion and distrust. Most people complained though or were shocked when it went bad.

When you have a system where people are expected (and are used to) to borrow 3-5 times their (pre-tax) annual salaries to be able to co-own a modest house through a bank, I would suggest that there are always going to be the risk of problems when one combines this with human greed and our peer-pressured lives to consume and multiply at all costs.

I don't mean for this to sound "gloomy" particularly - it is just that I do get frustrated by the fact that we seem to repeat the same acts over and over again and expect the outcome to be different. This apparently is a good definition of "insanity".....

Good luck all.

J