Those famous economists, Fun Boy Three and Bananarama put their fingers on it. “It’s not what you save,” said the Nobel Laureates, “it’s the way that you save it.” And the conclusion that has earned them such high esteem among the great and the good: “And that’s what gets results.”
UK households are saving more. Back during the boom, the good old days when house prices only ever went up, the UK enjoyed its longest ever run of economic growth, and little matters such as the fact that median wages were not actually rising that fast at all were forgotten, and we didn’t save much. In fact the UK savings ratio in 2008 was just 1 per cent. Mind you in the US, where median incomes didn’t actually rise for one and a half decades, the savings ratio went negative. By around 2010 the UK saving rate had risen to 9 per cent. It has fallen back very slightly since, but bearing in mind that real wages have been dropping, that is hardly surprising.
What we have seen since 2008 is a double whammy – at least a double whammy as far as consumer spending goes. Real wages have fallen while we have saved more at the same time.
By the way, in this context savings is a net term: so savings fall if we borrow more, and rise if we re-pay debt.
We all know UK households need to save more. Perhaps when house prices were rising, and before that when stock markets were rising it did not feel so important. Besides there is this thing called the retirement of the baby boomers just starting. A generation does not have enough money tucked away, and that means they need to start saving, and saving fast.
Three other factors may be at play.
To explain the first, consider this. There is something to be said for borrowing when we are young, and our income is lower, and saving when we are a bit older and earning more money. Then we can draw down on our savings when we retire. If we play that right, we can even out the amount of money we have to spend over our life time. The snag with that is that it is very difficult to know what we will earn in the future, and, as a whole, humans are optimistic by nature. So there is always a danger we will borrow more than we afford. But is it possible that the downturn of recent years has reduced our expectation of future income, and therefore we have decided we cannot justify so much debt?
The second point is simply that banks are less willing to lend. So even if we want to run-up debts, we may not be able to do so.
And thirdly, of course, there is the fact that we may have run up too much debt in the past, and now realise we have to repay it.
But whatever the reasons, we are saving more.
While saving may be good for us as individuals, it may not be good for the economy. If we save money, but it lies idle – with banks unwilling to lend it on – then effectively money is being drained from the economy. So we need to do one of two things: either save less, which is good for the economy but may be bad for our own balance sheets, or we need to find a way of ensuring that the money we save is used to fund investment in making the UK a more productive place.
And that is why we have quantitative easing, and low interest rates. Savers may not like it; it may even be costing pension funds their valuations, but the whole point of the Bank of England’s monetary policy is to try to change the way we save. It is trying to get money into more risky assets.
Because if we want results, it is not what we save that matters, it is how we do it.
©2012 Investment and Business News.
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© Investment & Business News 2013