Do savings promote or hamper economic growth? The Euro area example

De Koning, Kees (2013): Do savings promote or hamper economic growth? The Euro area example.

Abstract

Individual households save out of income by postponing consumption. Such savings are used not only by companies to expand production or by some individual households to increase consumption through borrowings: the economic use of savings. For instance in the U.S. in 2005 and 2006 65.5% of the savings allocated to home mortgages were used to increase prices of existing homes over and above the CPI inflation levels. Such use of savings can be called the financial use of savings. Other examples of such financial use are government debt outstanding for longer than a year and share price increases after companies have received the proceeds from share listings.

The difference between the financial and economic use of savings is that the first category does not help output and employment growth. There are periods over an economic cycle that the financial use of savings increase, for instance through house or share price inflation. There is no guiding hand to stop this process early enough to stop the subsequent savings destruction process. The latter process is further complicated by governments’ extensive use of debt financing during the re-balancing period. Government debt outstanding for over a year does not contribute to output or employment growth: it is again a financial use of savings.

The long adjustment period since 2008, which is far from over for the Euro area countries, shows that fiscal and monetary policies have been very slow in getting unemployment levels down. The main reason is not that there is a lack of savings, but that on a temporary basis the savings allocation process needs to be re-balanced away from its financial and towards its economic use.

Why and how this could be done is the subject of this study. The Euro area was chosen as an example as youth unemployment and overall unemployment rates are at historical highs, share prices are still far below 2008 levels and house prices with the exception of Germany and Austria have hit a seven year low.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic use of savings; financial use of savings; output and employment growth; quantitative easing; economic easing; traffic light system; inflation-linked bonds; pension funds; banking reform.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

• Financial Times, London, U.K., 21July 2013, House prices in euro area hit seven-year low, article written by Michael Steen, Frankfurt.

• Spanishpropertyinsight website: article by Mark Stucklin, April 22 2013 on census shines light on Spain’s empty housing problem

• The world’s dream: economic growth revisited by Drs Kees De Koning, 25th September 2013 available at: http://mpra.ub.uni-muenchen.de/50190/

• Federal Reserve Bank, St. Louis, U.S. Monthly and annual housing starts statistics and B100 Balance Sheet of Households and Nonprofit Organizations

• Confederation of British Industry (CBI), London, U.K. Press release 10th December 2013: Business investment being stifled by cost of defined benefit pension schemes; CBI/Standard Life survey.

• Towers Watson, Reigate, U.K. Global Pensions Assets Study 2013, published 31st January 2013

• Organisation for Economic Cooperation and Development (OECD), Paris, France, Better Life Index, country Netherlands: average disposable income levels

• Mish’s Global Economic Trend Analysis article of 21 November 2013 by Mike Shedlock, Sitka Pacific Capital Management LLC, Sonoma, California, U.S. : Spain’s households income drops 10% from 2005.