Munich Personal RePEc Archive

The Collective Individual Households or Coin economic theory

De Koning, Kees (2013): The Collective Individual Households or Coin economic theory.

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Abstract

The collective individual households or coin economic theory aims to study how savings have been and are being allocated to the various asset classes and how they are being used.

The main conclusion from this study is that some savings can be held in the financial sector and stay there while other savings are transferred to the real or business sector in order to increase output and create employment. An analysis of the Balance Sheet of Households and Nonprofit Organizations as produced on a quarterly and annual basis by the Federal Reserve Bank in the U.S. helps to underpin this theory. For instance the net financial assets of individual households in 1985 were 1.93 the nominal GDP level in that year. In 2013 as per end of June it had reached the level of 2.90 times the forecasted GDP for 2013.

The main reasons are that financial assets allocated to share equities do not represent the volume amounts of savings transferred to the company sector. Greed and fear may influence the financial assets allocated to shares rather than expected future profits. The second reason is that U.S. government debt is a type of consumer debt; once used it rapidly loses its GDP value. Government debt also does not create a cash flow, like the company sector does. Savings can only be allocated once and if they stay in the financial sector, they do not help the business sector to develop.

The 1929 Great Depression started off with a boom-bust stock market, followed by a run on the banks. So, on a smaller scale did the dot.com bubble burst in 2000-2001.The current financial crisis was a home mortgage crisis, which not only affected property prices, but also the collective individual households income earnings and allocation of incomes. Over the period 2008-2012 5.4 million households lost their homes through repossession or 1 in 10 households with a mortgage. More than 20 million households or 1 in 6 households were involved in foreclosure proceedings during the same period.

The collective individual households changed their spending habits from 2008 onwards. They repaid $1.15 trillion of the national home mortgage portfolio and funded the construction of over 4 million new homes out of incomes and savings. Of course, the demand for goods and services dropped with all the unemployment and income effects, the latter increasing at below inflation levels.

The U.S. government’s reaction was funding an accumulated deficit of $ 7 trillion since 2008; on top of this the Federal Reserve spent another $2 trillion on buying up government and other securities. This amounts to $57,000 per individual household.

The main reason that the use of these funds has been so ineffective is that it did not address the core cause of the fall in demand: the wish and the need by individual households to restore their individual balance sheet.

The coin economic theory may help to show that financial sector (equals savings) growth does not equate to GDP growth. In this article the theory explores the allocation of savings, the role of interest rates, the causes of financial crises, the savers and borrowers’ philosophies, the difference between financial sector companies as savings distributors and real businesses as users of savings for production purposes and the possible correction mechanisms including economic easing. The latter method implies no additional borrowings for individual households but a temporary transfer from their own financial assets to the income side of individual households

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