Let’s say you get paid on the last day of the month, but what happens if your pay doesn’t arrive? You check your bank account and it’s not there, no pay. How long will you be able to last?

According to research from HSBC, no less than 8 million households would run out of money before the weekend.

In fact, HSBC reckons that 31 per cent of all UK households have less than £250 set aside as a financial safety net. Apparently, the recommended minimum ‘salary cushion’ is three months’ average monthly take-home pay, which is £5,756.20.

So there you have it; we are not saving enough. We must save more.

On this theme, a report was issued last week from an organised called Save Our Savers. Here is the report if you want to read it: it’s called ‘What’s wrong with the economy’. http://www.saveoursavers.co.uk/whats-wrong-with-the-economy/. The thing is the report said a lot that was right. It pointed to the huge level of debt in the UK, and referred to a zombie economy, one in which failing businesses and business practises are saved by the government, meaning we can never move on. It is just that the report’s conclusion was wrong.

This is what it said: “Savings are being undermined. But savings provide the investment funds without which an economy is incapable of long-term sustained growth. Low interest rates and QE do not produce growth but distort the economy, devalue pensions and annuities and create inflation.”

But the report’s authors miss the point. While it is true that some sectors of the UK are in debt – way too much debt – other sectors are saving too much. According to a report from Ernst and Young published earlier this year, corporates themselves are sitting on a cash pile of a £754 billion.

According to a survey from YouGov, when asked how they would spend a windfall equivalent to one month’s income, 84 per cent of households said they would save it, or use it to pay down debts (33.7 per cent), while only 16 per cent said they would spend it.

You can understand why households want to do that. The truth is that despite interest rates being at record lows, households want to save more.

Zoom out, and take a look at the big picture. Factor in the retirement of the baby boomers. Just to remind you, the 1990s was a good time to retire because equities had performed so well over the previous couple of decades. Most of the noughties were a good time to retire for those who owned their home because of the rise in house prices.

But we are set to see the largest scale of retirement ever in the history of this country. If the odd baby boomer downsizes and funds his or her retirement from the equity in his or her home, that may be fine. But when this occurs en masse, the result won’t be so pretty.

Baby boomers need to save more, and despite low interest rates, will save more.

But for UK plc this will be a disaster.

As savings rise, spending will fall, GDP will contract, and debt to GDP will rise even further.

Returning to the HSBC report,  no doubt UK households would feel a lot happier if they had savings equal to three months’ pay in their bank account. But if this were to happen too quickly, say over the next two years; if households everywhere were try to build up savings very rapidly, the result may well be a much deeper recession than the one we just pulled out of. Job losses would mount, and savings worth three months’ pay wouldn’t be enough.

What would make sense for the economy at large, however, is for a kind of national insurance, in which we put, say, 12 per cent of our pay into a national scheme, and those who lose their jobs, can dig into this national savings scheme. It is just that some might say such a system already exists, albeit many want to be rid of it.

And finally, as for the argument that QE and bank bail-outs are bad for savers, just remember if banks had not been bailed out, the result would have been for banks across the world to go under. The only way savers have avoided losing their savings was deposit protection schemes. In other words, savers would have expected to have been bailed out by governments, which in turn would have led to even greater government debt.

©2012 Investment and Business News.

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© Investment & Business News 2013