Loan becomes lower :) typo sorry

I always used to, now I just don’t have it.

To Tracey.. youre the one speaking the truth!

Lorraine.. how weird a person is to thumbs down you on your comment.
To that person.. you must have enough in your account to not be able to understand what its like to have nothing to save.. weirdo!

$900 (€749) each per week?! Were you arms dealers?

Crap man, I hope things take a massive turn for the better for you real soon :)

How do you cope?

Sarcasm?

saving is a leakage from the economy, spending money grows the economy!

While saving is important, if people sit on what they have and don’t spend more than meets their minimum requirements, the status quo is maintained. If the economy is to grow, then so too must spending…

sure, get the government to change their policy on upward only rent reviews, then prices in the shops might come down, then people might start spending. It’s a two way street ya know.

@Niall

Saving is not leakage. Money on deposit is how banks should finance lending. Sadly we borrowed short term money and lent long term. The saving that’s going on today is helping to repair the balance sheets of banks, which in future will allow credit to flow to businesses and individuals.

While spending is an important component in an economy, credit is the real driver of economic growth under our system. When banks are adequately capitalized, they take your savings and lend to business. Those businesses present a case to the bank where they can grow their revenue and employ more people. Those employees then have an income, which flows into consumer spending. This increased spending has a knock on effect for retail and the service sector, who use that increased inflow to make a business case to borrow money and expand their business.

If everyone went and spent their savings, there would certainly be a pop in consumer spending, but it would be unsustainable, and the funds wouldn’t be in the banks to allow existing businesses to expand, and new businesses to pop up. Furthermore, the gain would be unsustainable as people will always need to save for things.

What happened in Ireland from 2002-2007 was a perfect storm of:
- An influx of foreign money, along with inadequate capital ratio requirements for banks, allowed lending outside of normal parameters (basing it on capital in the bank)
- That hot money flowed into property, and was backed by increasing asset values, seemingly improving the banks capital ratio and creating a bubble in their balance sheet
- More and more crazy multiples of earnings (unsustainable mortgages) were loaned to people on the premise that ‘sure the house will be worth more next year if they can’t keep the repayments up’
- Products like 100% mortgages meant people no longer needed to save, so our saving rate declined considerably.

When the bubble popped
- The assets values backing up loans on the balance sheet of the banks collapsed
- The influx of foreign money to lend stopped
- People lost jobs
- People stopped spending
- Businesses built on bubble spending collapsed
- The banks had no money to lend
- People have to save a deposit to buy a house again.
- All this is further compounded by the government’s need to take 3bln a year out of the economy (we spent the bubble money on government spending)

We are now catching up on a deficit in the banks balance sheets that could take a long time to repair. It’s not as simple as ‘spend money and we’ll all be grand’. We need credit to drive the economy, and we have to start building up the capital in the banks gradually so that they can start to lend to businesses that provide real growth (i.e. in the export of goods and services). This will drive real economic growth that can create jobs.

Believe it or not, we’re not actually far away from having adequate capital ratios in the pillar banks. In theory, there should be a trickle of an increase in lending in the next 6-12 months. This might mean, for instance, that the banks can join consortia to get involved in PPP projects that create employment. Or it might mean that they back a loan to an exporter (multinational or otherwise) to create jobs here. These are the projects which will slowly create the demand for goods and services internally. It will be a slow recovery, however, and jobless for the first few years.

A combination of improved bank capital ratios, and creating the right conditions for business (we already are an attractive prospect for multinationals) will allow us to improve our piece of the global export pie. However, that pie isn’t growing right now, and until it does grow, we will create few new jobs (and probably no new net jobs as the government balances the budget).

Savings are good. They go around saying we should be spending more, but that’s more to soften the bad environment than it is a suggestion that we can spend our our way into recovery. Full recovery in the consumer spending economy will have to wait until the banks are healthier and the global economy improves.

Look up “The Paradox of Thrift” and then reexamine your statement

I’m well aware of the Paradox of Thrift. I’m also well aware that spending creates confidence, which we ultimately need.

I’m arguing, however, that consumer spending alone cannot sustain economic growth.
- We are resetting our economy right now, by reducing the level of private indebtedness.
- We never had the economy to sustain the spending of 2002-2007. It was all borrowed money backed by property, property and more property. The knock on effect of the property bubble in terms of employment and extra consumer spending led to more private borrowing for unsustainable lifestyles.
- We require functioning banks to provide credit. The banks will be able to create new good lending (whatever horrors may be ultimately on the books) when the capital ratios are good and property values stabilise (possibly happening now)
- We will see modest growth now (hopefully, if the global climate can improve), but I don’t think we’ll ever see the profligacy of the Tiger years here again.

Yes, savings take money out of today’s economy, but they’re also laying the groundwork for tomorrow’s economy. We need to have the balance between Bank Capital, Bank Lending and the throughput of money.

Fractional Reserve Banking is nicely explained here.
http://money.howstuffworks.com/personal-finance/banking/bank1.htm

Increased capital requirements for banks means that the multiplier effect has been slowed down. This is good and may help to avoid such excessive bubbles in future (bubbles are, however, inevitable). Unfortunately this means that the creation of money through lending will be slower as we recover, so credit won’t be as fast and easy in the new economy.

However, we still need to have Irish capital in the Irish banks so that they can create money. The days of importing the capital to create money in the Irish economy are over for now.

Excellent points Peter & Ronan.
It is not coincidental that nations like Switzerland, Singapore and Taiwan, with traditions of higher levels of personal saving have among the lowest levels of unemployment. This blows a hole in the ‘paradox of thrift’ fallacy.
Unfortunately, too many of the citizens of economically distressed nations have bought into the half-baked wafflings of economically illiterate politicans.

@Ronan,

thanks for your really long reply, without going into detail like yourself i’m still pretty sure saving is a leakage from the circular flow of household income in the economy. My comment was a reaction to “When people save money the economy grows!”

@Niall,

I agree that saving does not directly bring about economic growth.

We’ll meet in between :)

The short-term effect of an increase in the savings rate is to take money out of today’s economy, in fact more than is saved due to the multiplier effect. This is one of the reasons that there’s so much carnage out there. You can’t expect people not to save when there’s uncertainty however.

The medium-term reality is that the economy needs to heal and re-establish itself on a sounder footing. To that end, an increase in the savings rate will enable the economy in the medium term, as the banks will be adequately capitalized to drive economic growth via credit, and people will be less indebted.

Ultimately, banks need to lend to make money, so the money will be unleashed in the future, putting everything that savings take out of the economy today, back into the economy of tomorrow.

This is without even getting into the fact that consumer spending mostly enriches those that we import from: German car makers, Italian shoemakers, UK high street fashion retailers etc, with only a small portion staying in Ireland in the form of low income wages.

“Say’s law, also known as the law of markets, is an economic concept that states that products are used as a means to acquire more products. That is, people sell products or services to earn money to buy other products or services. Though the concept had been stated by others before him, Jean-Baptiste Say, a French businessman and economist, is given credit for the law. The law specifically applies to market economies, or economies which are driven by free and open supply and demand.”

In a nutshell, economies with enhanced abilities to produce tend to be more dynamic and sustainable.
Economies with enhanced abilities to consume tend to be more indebted and are not sustainable.
Delaying consumption (saving money) provides investment capital for production.

Andrew… Smart people wouldnt write that sort of comment.